What would you use in conjunction with free cash flow multiples – Equity Value or Enterprise Value?
Answer
Trick question! For Unlevered FCF you would use Enterprise Value and for Levered FCF you would use Equity Value. The reason this happens is because Unlevered FCF excludes interest, so that cash is available to every investor, debt and equity alike. Levered FCF is after interest, meaning the money left is only available to equity investors.
Why this matters to bankers
Using the correct FCF multiples is crucial to create a correct LBO (uses Levered FCF) and DCF (uses Unlevered FCF).