What does it mean for a firm to be "unlevered"?

A firm being "unlevered" means that it does not have any debt and is financed entirely with equity. This implies that the firm relies solely on shareholders' equity for its operations and growth, rather than borrowing money. An unlevered firm does not incur interest payments, which can provide advantages such as reduced financial risk during downturns and simplified financial management.

The absence of debt means that all of its capital structure is composed of equity, enabling it to maintain full control and ownership by its shareholders without any obligations to creditors. This is particularly significant in assessing the overall risk and return profile of the firm, as unlevered firms typically have lower risk, which can translate into different valuation metrics compared to leveraged firms.

In contrast to other choices, the notion of negative cash flow or volatile earnings does not inherently relate to a firm's leverage status. Similarly, being in a transitional phase of financing does not define whether a firm is unlevered; it may still possess debt during such transitions.