hello, I have a doubt from corporate finance (I use the book corporate finance f
ID: 2649674 • Letter: H
Question
hello, I have a doubt from corporate finance (I use the book corporate finance from Ross westerfield and jaffe). When valuing a firm using the Wacc as the discount factor, we use the unleveraged free cash flows to compute the value of the leveraged firm. But I want to know if you could use the total free cash flow from a leveraged firm (cash flow to investors and creditors ) instead of the unlevered free cash flow and discount it at pre tax Wacc that doesn't include the interest tax shield (B/V * Rb + S/V *Rs instead of B/V * Rb * (1-t) + S/V *Rs) . What I mean is that previously we used a post tax Wacc for the unlevered cash flows, so could we use a pre tax Wacc for the levered total cash flows to creditors and investors?
Explanation / Answer
Total free cash flow from a leveraged firm (cash flow to investors and creditors) or free cash flow to equity (FCFE) means how much cash can be paid to the equity shareholders of the company after all expenses, reinvestment and debt repayment.
FCFE = Net Income after tax before depreciation - CAPEX - Working Capital change + New Debt - Debt Repayment
Unlevered free cash flow shows how much cash is on hand to pay for operations before financial obligations are considered.
Unlevered Free Cash Flow = EBITDA
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