Levered free cash flow

Levered free cash flow takes unlevered free cash flow, subtracts cash interest after tax, subtracts scheduled debt repayments, and adds back new borrowing drawn in the year. The result belongs to shareholders alone, so it is discounted at the cost of equity and gives equity value with no bridge from enterprise value at the end.

It is conceptually valid and reconciles exactly to the unlevered route when the cost of equity and the WACC reflect the same leverage. That reconciliation is a common interview test, because it forces a candidate to show that the two methods are the same argument seen from two ends rather than competing techniques.

It is rare in practice for four reasons. Nothing can be computed until the whole debt schedule is forecast. The result becomes sensitive to financing choices that say nothing about the business, so two identical companies with different debt produce different values. The cost of equity changes as leverage changes, so a single rate across a deleveraging forecast is wrong at both ends. And every cross check, trading comparables and precedent transactions alike, is normally quoted on enterprise value.

It becomes the required method where debt is not financing but raw material. A bank funds itself with deposits, so there is no unlevered bank and no net debt to bridge with, which is why financial institutions are valued on dividend discount or residual income models discounted at the cost of equity.