Which financial metric is considered when calculating levered free cash flow?

• A. Net Income
• B. Cash Balances
• C. Operating Expenses
• D. Tax Liabilities

Answer: (A)

Levered free cash flow (LFCF) is a crucial financial metric that represents the cash available to equity shareholders after all financial obligations, including debt payments, have been met. When calculating levered free cash flow, net income is considered because it reflects the company's profitability after expenses, taxes, and interest—essentially, what remains from revenues after expenses.

Net income serves as the starting point for the calculation, allowing analysts to add back non-cash expenses and adjust for changes in working capital, providing a clear picture of the cash that is available to equity holders. This makes it an essential component in determining the financial health and cash-generating capability of a business after accounting for its debt obligations.

Cash balances, operating expenses, and tax liabilities, while relevant in other contexts, do not directly serve as the foundational metric in the computation of levered free cash flow. Instead, they may influence net income figures but are not the primary component in this specific calculation.