DCF method - taxes and EBIT
Hi everybody,
Concerning the DCF method, could you please tell me why do we substract taxes from EBIT and not from EBITDA or Net Income or any other item ?
Many thanks
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If you subtract it from EBITDA you get to EBIDA as T stands for taxes. You subtract T(axes) and (I)nterest from EBIT to get to net income, which is below the tax line.
Thank you Patrick Batman, but I don't understand the rationale behind this. Why don't we simply start from the Net Income to calculate the FCF ? Because I believe that interest expenses are cash out items and if we start from the EBIT it doesn't take into account this
Because the FCF you calculate is FCF to firm and not FCF to equity. Net income only reflects equity.
Why do we want to calcule the FCF to firm and not FCF to equity ?
Have you gone through a step-by-step guide for DCF?
You value the firm, this is why you divide FCF by WACC and not cost of equity. Just in the end, when you have the EV you do a bridge back to get to the EqV.
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