When applying price-to-free-cash-flow (FCF) multiples, which value should be used with unlevered FCF?

• A. Equity value.
• B. Enterprise value.
• C. Net income.
• D. Book value of equity.

Answer: (B)

Unlevered free cash flow is the cash a business generates after operating expenses and taxes, before any financing decisions like interest or debt repayments. Because it’s available to all capital providers—both debt and equity—the natural value measure to pair with it is the enterprise value, which represents the total value of the company to all providers. Using enterprise value in the multiple captures the relationship between the whole firm’s cash generation and the wealth across all claimants. If you used equity value instead, you’d mix a cash flow that’s available to all providers with a price that reflects only the equity claims, which can misprice the firm since debt and financing choices aren’t accounted for in the numerator. Net income and book value of equity are not cash flow measures, and they don’t align with unlevered FCF, so they’re not appropriate bases for this particular multiple.