Investment Banking Interview Question Explained - UFCF vs CFO–CFI

A common investment banking and private equity interview is question: How does Unlevered Free Cash Flow (UFCF) relate to the cash-flow-statement method (CFO – CFI)?

In this video, we walk through it step by step, show when they match, when they diverge with interest, and answer whether CFO is levered or unlevered.

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Chapters

0:00 Intro
0:30 Step 1: Standard Unlevered Free Cash Flow (UFCF) calculation
1:59 Step 2: Calculating FCF via Cash Flow Statement (CFO – CFI)
2:50 Connecting the two approaches
3:59 Difference between UFCF and CFO – CFI when interest is present
4:25 Interview Q1 - UFCF vs the CFS method (CFO – CFI)—which is “right” and why?
5:53 Interview Q2 - Is CFO levered or unlevered?

Full walkthrough

We first build UFCF from operating performance: start with EBIT, apply cash taxes, add back D&A, adjust for ΔNWC, and subtract CapEx—capturing the business’s core, pre-financing cash generation (EBIT(1–T) + D&A – ΔNWC – CapEx).

Then we show the statement route: begin at Net Income, add back D&A, adjust ΔNWC to get CFO, and subtract CapEx in CFI—i.e., CFO – CFI. With no interest, both methods land on the same number (different paths, same economics).

Introduce interest and the CFO – CFI path becomes levered under U.S. GAAP because Net Income is after interest; the bridge to UFCF is after-tax interest (e.g., subtract Interest × (1–T) to move from UFCF to CFO – CFI).

That’s why, under U.S. GAAP, CFO is levered; IFRS classification can differ, but we stick to U.S. GAAP here.

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