LBO (other)

Question 1

4. How is the “Free Cash Flow” in an LBO model different from the FCF in a DCF?

Answer 1

First, the purpose is quite different since FCF in an LBO model determines a company’s ability
to repay Debt, not the implied value of the entire company.
Second, FCF in an LBO model starts with Net Income, not NOPAT, and so it includes the Net
Interest Expense. But it’s also not Levered FCF since it does not include Debt principal
repayments.
Finally, while FCF is the end point in a DCF, you have to go beyond it in an LBO model because
of the company’s Beginning Cash Balance, Minimum Cash, and, potentially, other obligations
such as repayments of Existing Debt.