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.

Private sellers don’t have a readily observable market price for their equity, so valuation focuses on the business’s fundamentals rather than market chatter. Traditional methodologies like discounted cash flow and comparable company analysis anchor value in what the company is expected to generate in cash and how similar businesses are valued in real transactions. DCF translates future cash flows into a present value, reflecting growth, profitability, and risk, while comps provide a reality check against observable multiples from similar entities, giving a sense of value relative to peers. The other approaches rely on inputs that aren’t readily available or reliable for a private company. A premium over a current share price presumes there is a current market price to exceed, which private sellers don’t have. Market sentiment indicators depend on public trading activity and investor mood, which don’t apply to a private, illiquid company. Inventory valuation is an accounting measure of assets on hand and doesn’t by itself capture the full enterprise value of the business.

The main idea here is that the most direct way to gauge how a merger affects shareholders is earnings per share. EPS shows how much profit is attributable to each share after the deal, incorporating both the combined earnings and any dilution from new shares or other adjustments in share count. By comparing the pro forma EPS after the merger to the stand-alone EPS before it, you can tell if the deal is accretive (increases EPS) or dilutive (reduces EPS) for shareholders. If the post-deal EPS is higher, that indicates a favorable outcome for shareholders on a per-share basis. Revenue growth, market capitalization, and debt ratio matter for overall value and risk, but they don’t directly measure how the deal changes earnings available to each share, which is why EPS is the best answer for evaluating shareholder benefit in a merger model.

Unlevered Free Cash Flow multiples are used with Enterprise Value because these cash flows belong to all providers of capital—both debt and equity—before any debt service. Free cash flow to the firm represents the cash the business generates that is available to pay lenders and shareholders after operating needs and capital expenditures are covered, so the appropriate valuation anchor is the value of the entire enterprise. That value is Enterprise Value, which reflects debt, equity, and other claims on the business. Equity Value would pair with cash flows that are after debt service (levered), since those flows go to shareholders. Net Debt is part of how you compute Enterprise Value, not the multiple basis itself. Levered Free Cash Flow is cash flow to equity after debt SAMPLEpayments, so it aligns with equity-based valuations rather than UFCF multiples.