Since LFCF pertains only to equity shareholders, the discount rate it pairs with is the cost of equity (ke), which would be used to calculate the equity value in a levered DCF model. For instance, interest payments are received only by debt holders, which are higher in priority than all equity holders in the capital structure. Levered Free Cash Flow: LFCF is a “levered” measure of cash flow because of the inclusion of expenses that stem from financing obligations, namely interest expense and mandatory debt repayment.What’s the Difference Between Levered Free Cash Flow vs. Low LFCF: Less Discretionary Cash and Less Debt Capacity, and High Credit Risk.Higher LFCF: More Discretionary Cash, Greater Debt Capacity, and Low Credit Risk.Thus, equity shareholders such as private equity firms pay close attention to the levered free cash flow metric, since LFCF can be a proxy for the state of a company’s financial health. Stock Buyback: Repurchase Previously Issued Shares to Reduce the Number of Shares in Circulation.Reinvestment: Reinvest the Funds into Operations (Working Capital, Capex).Dividend Issuance: Cash Payments to Preferred and Common Equity Shareholders.While the remaining proceeds technically belong to the shareholders, the allocation of the cash is at management’s discretion. those in possession of shares that represent partial ownership stakes in the company’s equity. Once the items listed above are deducted, the leftover cash flow belongs to the shareholders of the company, i.e. Financial Obligations (Debt-Related): Mandatory Debt Amortization, Interest Expense. Reinvestments: Net Working Capital (NWC), Capital Expenditure ( Capex).Operating Costs: Cost of Goods Sold (COGS) and Operating Expenses (SG&A, R&D).Levered free cash flow, or “free cash flow to equity”, represents a company’s remaining cash flows generated from its core operations once all spending obligations related to operating costs, reinvestments, and debt-related payments are fulfilled.
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