Basic Technical Investment Banking Practice Test

The difference comes down to what cash flow you’re measuring: cash flow available to all capital providers (debt and equity) versus cash flow available to equity after debt payments. Unlevered Free Cash Flow uses EBIT after tax (NOPAT) as the starting point, adds back non-cash charges, and then subtracts capital expenditures and changes in working capital. This shows the cash generated by the firm’s assets before any financing decisions, i.e., before interest and debt. It represents the cash that would be available to all providers of capital. Levered Free Cash Flow starts from cash flow from operations (CFO) and then subtracts capital expenditures. CFO already reflects taxes and interest and other operating items, so after subtracting CapEx you get the cash flow that remains for equity holders after debt service. This is cash flow to equity, not to all capital providers. That’s why the stated approach is correct: UFCF = EBIT after tax + non-cash charges − CapEx − ΔWC; LFCF = CFO − CapEx. The other statements misstate whether interest or taxes are included or imply identical calculations, which they are not.