Levered FCF includes which item?

• A. Interest payments.
• B. Interest income.
• C. Taxes only.
• D. Depreciation.

Answer: (A)

Levered free cash flow is the cash that remains for equity holders after the company has met all its debt obligations. Because debt service includes cash outflows to lenders, interest payments are part of what must be paid before any cash can be distributed to shareholders. So, when you’re measuring levered FCF, the interest payments are the cash outflow that sits on the debt side of the equation, reducing the amount available to equity.

Interest income is a source of cash the company might receive, not a mandatory cash outflow, so it isn’t something you’d count as part of levered FCF. Taxes are involved, but levered FCF isn’t limited to taxes alone; it reflects all debt service effects on cash after operations. Depreciation is a non-cash charge that is typically added back in different cash-flow measures, but it isn’t an actual cash outflow that determines how much cash remains for equity after debt obligations.