What is the primary difference between Unlevered DCF and Levered DCF?

The primary distinction between Unlevered DCF and Levered DCF lies in their treatment of cash flows and the audience to which those cash flows are available. The Unlevered Discounted Cash Flow (DCF) model evaluates the cash flows from operations that are available to all investors, both equity and debt holders. This method focuses on the company’s total cash flow generation capabilities without taking into account the effects of debt financing. By doing this, it provides a clearer view of the firm's operational performance and value, independent of its capital structure.

In contrast, the Levered DCF model assesses cash flows that are available exclusively to equity investors after accounting for interest payments on debt. This means that the cash flows considered in a Levered DCF are net of debt obligations, which limits the view of the firm's value to a subset of total investors. Therefore, the unlevered approach is often preferred when evaluating the total value of a business since it presents a comprehensive picture of cash flow generation without the influence of leverage.

The other options do not correctly capture the essence of the differences between these two valuation methods. For example, while Levered DCF does involve considerations of capital structure, the main focus should be on the nature of the cash flows being analyzed