medium · Corporate Credit Analysis
An analyst is evaluating two firms with identical EBITDA of $100M and identical total Capex of $40M. Firm A has $200M of debt at 5% interest, while Firm B is entirely equity-funded.
Which firm will show a higher Unlevered Free Cash Flow (UFCF)?
- Firm B, because it pays no interest
- Neither; they will have identical UFCF
- Firm A, because its cost of capital is lower
- Firm A, because it benefits from the interest tax shield
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