When applying FCF multiples to levered FCF, which value should you use?

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Multiple Choice

When applying FCF multiples to levered FCF, which value should you use?

Explanation:
When you apply levered FCF multiples, the focus is on the cash flow that remains after debt service and is available to equity holders. Levered free cash flow represents cash to equity investors, so the appropriate base for the multiple is equity value (the value of the equity itself). Using enterprise value would mix in debt and interest obligations, which levered FCF already accounts for when determining what goes to equity. Gross profit and net working capital are not cash-flow measures tied to equity distributions, so they don’t fit this multiple.

When you apply levered FCF multiples, the focus is on the cash flow that remains after debt service and is available to equity holders. Levered free cash flow represents cash to equity investors, so the appropriate base for the multiple is equity value (the value of the equity itself). Using enterprise value would mix in debt and interest obligations, which levered FCF already accounts for when determining what goes to equity. Gross profit and net working capital are not cash-flow measures tied to equity distributions, so they don’t fit this multiple.

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