Breaking Into Wall Street 400 Practice Test

Unlevered free cash flow is the cash generated by the business after taxes and reinvestment, available to all providers of capital—both debt and equity. That means it reflects the firm’s cash-generating power independent of how it’s financed. To value the whole firm, you compare this cash flow to the value of the entire enterprise, which is the enterprise value. Using EV as the denominator keeps the multiple tied to the cash flow available to all capital holders and makes comparisons across firms with different debt levels meaningful. Using equity value would tie the cash flow to only the equity claimants, skewing comparisons when leverage varies. Revenue or EBITDA aren’t actual cash flows after reinvestment, so they don’t measure the same thing as unlevered FCF. So the right approach is to use enterprise value.