@MarsC
I generally agree with you: if you buy the equity of a company, what you get is Earnings; if you buy the equity and the debt, what you get (before tax) is [Pre-Tax Earnings + Interest].
Therefore, you can either look at Earnings / [Market Cap] (i.e. levered/levered) or you can look at [Pre-Tax Earnings + Interest] * (1 – Tax) / [Enterprise Value] (i.e. unlevered/unlevered).
I think both are acceptable (although I do appreciate your point about low/high yield environment), as long as one knows what he/she is doing.
The main advantages I see with the latter approach (FCF/EV) are that:
1) It allows for a comparison between the earnings power of two different companies, irrespective of their differences in capital structure.
2) It allows for a more meaningful assessment of "company risk" when the benchmark for comparison is a risk-free yield (government bond or similar).
But, as you say, trying to calculate such a yield as levered/unlevered is unreasonably conservative. In fact, I feel it is also somehow conceptually incorrect, as it does not reflect the return from an actual investment proposition, unless the cost of debt is zero. I do not think this third approach is what anyone here was deliberately trying to do, though?
(20min delay)