What Is Unlevered Free Cash Flow?
Unlevered free cash flow (UFCF), also called free cash flow to the firm, is the cash a company's operations produce before any financing decisions, meaning before interest expense or debt repayments. Because it belongs to all capital providers, both lenders and shareholders, it corresponds to enterprise value rather than equity value.
The standard buildup is UFCF = EBIT x (1 - Tax Rate) + Depreciation and Amortization - Capital Expenditures - Increase in Net Working Capital. Interest is deliberately excluded so the cash flow reflects the business itself, not how it happens to be financed.
How It Works
UFCF is the numerator of the classic DCF: you project it for five to ten years, discount each year at the weighted average cost of capital, add a discounted terminal value, and the sum is enterprise value. Using WACC is what makes the framework internally consistent, because a cash flow available to all investors must be discounted at the blended required return of all investors.
Starting from EBIT and applying the full tax rate creates a hypothetical taxes-as-if-unlevered figure called NOPAT, which ignores the tax shield from interest; that shield is instead captured in the WACC through the after-tax cost of debt. Mixing levered and unlevered items is one of the most common modeling errors, so the discipline is simple: no interest anywhere in a UFCF build.
Example
Suppose a company has EBIT of $200 million and a 25% tax rate, giving NOPAT of $200M x 0.75 = $150 million. Adding back $40 million of D&A, subtracting $50 million of capex and a $10 million increase in net working capital gives UFCF = $150M + $40M - $50M - $10M = $130 million.
Discounting that $130 million one year at a 10% WACC contributes $130M / 1.10 = about $118 million to enterprise value, and repeating this across the forecast plus terminal value completes the DCF. Walking through this exact bridge from EBIT to UFCF is one of the most frequently asked technical questions in IB interviews.
Why It Matters
UFCF is capital-structure neutral, so it lets analysts value and compare companies regardless of leverage, and it is the foundation of DCF valuations in pitch books, fairness opinions, and investment memos. It also underpins metrics like unlevered FCF yield that investors use to screen for cash-generative businesses.
Because it feeds directly into enterprise value, remember the pairing rule: unlevered cash flows discounted at WACC give EV, while levered cash flows discounted at the cost of equity give equity value.
