How should an expected change in a company's capital structure be reflected in FCF?

Incorporating an expected change in a company's capital structure into Free Cash Flow (FCF) analysis is essential for accurate valuation. A levered discounted cash flow (DCF) analysis takes into account the impact of debt on the company's capital structure, which influences the cost of capital and ultimately the value of the firm.

When a company's capital structure changes, it typically affects the weighted average cost of capital (WACC), which is used to discount the cash flows. In a levered DCF analysis, the cash flows are generated after considering the interest expenses on debt, meaning the FCF reflects the financial obligations of the company. This levered approach provides a more realistic view of the company's cash flows, aligning them with the capital structure that will be employed in the future.

By focusing on a levered DCF analysis, it ensures that the varying effects of both equity and debt financing are accurately represented, leading to a more precise valuation of the company. Therefore, using a levered DCF approach is the appropriate method to reflect changes in capital structure within Free Cash Flow.