What is the consequence of using levered free cash flow in a DCF model?

Using levered free cash flow in a discounted cash flow (DCF) model results in calculating the Equity Value of a company. Levered free cash flow represents the cash available to equity holders after making interest payments and accounting for all operating expenses. This means that when you use levered free cash flow in your DCF analysis, you are inherently considering the impact of the company's debt on its cash flows, focusing on what is left available for equity investors.

In contrast, if unlevered free cash flow were used, it would provide the cash flows generated by the business before any debt payments and would lead to an Enterprise Value calculation since it reflects the value of the entire firm to both equity and debt holders. Therefore, the DCF analysis built on levered free cash flow is directly related to shareholders, emphasizing the cash flows relevant to equity valuation.

The other options present considerations regarding discounting and cash flow estimations but do not directly relate to the fundamental purpose of levered free cash flow, which is to ascertain equity value. Consequently, selecting the method of cash flow being utilized in a DCF is crucial to accurately determine the respective valuation type.