Unlevered vs. Levered Cash Flow

A Side-by-Side Walkthrough for the Series 79 Exam

“Your unlevered cash flow is always going to be greater than your levered cash flow.”
Now let’s take a look at a side-by-side comparison of these 2 elements. This exact logic shows up often in investment banking modeling—and yes, Series 79 exam prep candidates should be comfortable with it.

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Free Cash Flow to the Firm (FCFF): Unlevered Cash Flow

Starting point: earnings before interest and taxes (EBIT)

• EBIT: $420,000,000

Taxes on FCFF

• Tax rate: 28%
• Back out tax payment: $117,600,000

Depreciation

• Add back depreciation: $90,000,000

Net CapEx (CapEx − Depreciation)

• CapEx: $150,000,000
• Depreciation: $90,000,000
• Net CapEx: $60,000,000 (back this out)

Working capital

• Decrease in working capital: $31,000,000 (added back)

Result: FCFF = $273,400,000

Note: In this walk-through we reference both “add back depreciation” and “net CapEx (CapEx − Depreciation).” Using net CapEx already nets out depreciation; the stated result $273.4 million reflects subtracting net CapEx and adding the working capital decrease, in line with the example.

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Free Cash Flow to Equity (FCFE): Levered Cash Flow

Starting point: net income

• Net income:$251,400,000
  • (No separate tax line here—taxes have already been taken into consideration in net income.)

Non-cash add-back

• Add back depreciation: $90,000,000

Capital spending

• Subtract gross CapEx: $150,000,000

Working capital

• Decrease in working capital: $31,000,000 (added back)

Result: FCFE = $222,400,000

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Why FCFF > FCFE (in this example)

Your unlevered cash flow (to the firm) is calculated before the effects of financing to equity holders, while levered cash flow (to equity) reflects equity-only cash after financing choices. That’s why, here, FCFF ($273.4M) is greater than FCFE ($222.4M).

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Key Takeaways (and a quick Series 79 reminder)

• Unlevered cash flow (FCFF) starts from EBIT, adjusts for taxes, capital spending, and working capital.
• Levered cash flow (FCFE) starts from net income, then adjusts for non-cash items, capital spending, and working capital.
• In this example: FCFF = $273.4M and FCFE = $222.4M—reinforcing the opening line that your unlevered cash flow is always going to be greater than your levered cash flow.
• If you’re studying for the Series 79 exam, expect side-by-side FCFF vs. FCFE comparisons just like this.