The investment banking interview question we’re going to go over today is “Do we care more about UFCF or LFCF in LBO?” UFCF stands for Unlevered Free Cash Flow whereas LFCF stands for Levered Free Cash Flow. Here’s what you should say.
“In an LBO, we care more about LFCF.”
That’s it. Stop. Usually, the interviewer will follow up and ask you “Why?” Then you can explain the rationale.
“We care more about LFCF because it’s after deducting interest expense and so we can use it to calculate how much cash the private equity firm can use to repay the principal on the debt they borrowed.”
That’s how you should answer this question: “Do we care more about UFCF or LFCF in LBO“. The most common mistake I hear candidates say is that they care more about Unlevered Free Cash Flow in an LBO. Their reasoning is that UFCF is before debt and so that’s a great starting point to subtract all the debt obligations you need to pay in an LBO. We can understand why they would think that. But just know that mechanically, that’s not how the LBO model works. We care about Levered Free Cash Flow. If you want to gain a deeper understanding on this topic, check out the courses on our website.
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