What cash flow method accounts for debt in its calculations?

What cash flow method accounts for debt in its calculations?

• A. Unlevered Free Cash Flow (FCFF)
• B. Levered Free Cash Flow (FCFE)
• C. Net Operating Cash Flow
• D. Available Cash Flow

Answer: (B)

The Levered Free Cash Flow (FCFE) is the cash flow method that specifically accounts for debt in its calculations. This measure represents the amount of cash available to equity shareholders after all expenses, reinvestments, and debt repayments have been made. It starts with net income and adjusts for non-cash expenses, changes in working capital, and capital expenditures, but importantly, it also subtracts any interest payments and debt principal repayments, thereby reflecting the cash flow available to equity investors only after fulfilling obligations to creditors. Understanding this concept is crucial for investors as it provides insight into the financial health of a company concerning its ability to generate cash flows for shareholders while managing its obligations to lenders. This contrasts with unlevered free cash flow, which does not take debt into account and instead reflects the total cash generated by the company that is available to all capital providers before any debt service.

The Levered Free Cash Flow (FCFE) is the cash flow method that specifically accounts for debt in its calculations. This measure represents the amount of cash available to equity shareholders after all expenses, reinvestments, and debt repayments have been made. It starts with net income and adjusts for non-cash expenses, changes in working capital, and capital expenditures, but importantly, it also subtracts any interest payments and debt principal repayments, thereby reflecting the cash flow available to equity investors only after fulfilling obligations to creditors.

Understanding this concept is crucial for investors as it provides insight into the financial health of a company concerning its ability to generate cash flows for shareholders while managing its obligations to lenders. This contrasts with unlevered free cash flow, which does not take debt into account and instead reflects the total cash generated by the company that is available to all capital providers before any debt service.