The investment banking interview question we’re going to go over today is “What is unlevered free cash flow and how do you calculate it?” Unlevered Free Cash Flow, or UFCF, is an extremely important metric for investment banking. Here’s how you can answer it in an interview.
“Unlevered Free Cash Flow is the amount of cash flow a company generates after covering all expenses and necessary expenditures. So these are the cash flow the company is free to use however it likes because it has already paid its bills and reinvested into future growth.
To calculate Unlevered Free Cash Flow, we start EBITDA, less D&A because it’s tax-deductible, to get EBIT. And then we tax-effect EBIT to arrive at NOPAT. From here, we add back D&A, adjust for Changes in Working Capital and subtract Capital Expenditures. That’ll bring us to Unlevered Free Cash Flow.”
And there you have it. That’s how you should answer this question: “What is unlevered free cash flow and how do you calculate it”. An important thing to keep in mind is make sure you understand that Unlevered Free Cash Flow is different from Levered Free Cash Flow. The two are different, so make sure you don’t get them mixed up.