Adding back depreciation to free cash flow from EBITDA

Hi all,
I'm trying to calculate unlevered free cash flow to the firm, starting with EBITDA

The formula I have is fcff= EBITDA*(1-t)+D&A +/- WC changes – Capital expenditures

What I want to know is, should we be multiplying D&A by the tax rate before adding it in?

I understand that we have to add back D&A because they don't represent a real outflow of cash. But if we are given the income without D&A subtracted, do we just add the amount of tax the depreciation would have saved?

Thanks!

 

By using the formula you are using you are getting taxes paid on the basis of EBITDA. You could use the formula if EBITDA - Taxes (Based on EBIT) - CapEx +- Working Capital Requirements.

You are basically adding D&A twice which is wrong. Remember you want to add it because you want to know what are the real cash flows available to both investors. As D&A is a non cash expense you add it but just once.

To be honest, use the standard formula. You will be better off explaining the rationale in interviews and you will be wrong many less times.

EBIT(1-T) + D&A - CapEx +- Working Capital Requirements.

Cheers

 
Most Helpful

Agreed

Just to add, that the FCF does not take into account the interest expense. That is because you usually embed the (post-tax) cost of debt into your WACC. However, if you were trying to see the actual cash a company generates - say - in an LBO, do not forget to also subtract the post-tax net interest expense

Cheers

 

Correct on the formula, but remember that it's the change in working capital and not working capital itself that is netted out.

============================================================= Pursue Excellence, and Success will chase you, pants down.
 

Voluptatem sit nemo ad nemo voluptas consequatur. Commodi eaque eaque nihil est necessitatibus et. Molestiae tempora odio tempora quae quam et doloribus. Sunt doloremque optio ut voluptas molestiae alias. Voluptatibus eligendi soluta assumenda eum.

Sunt ea est saepe. Consequuntur dolor hic quod et. Dolores iure qui molestiae. Quaerat ipsa sint quae voluptatum fuga.

Array

Career Advancement Opportunities

April 2024 Investment Banking

  • Jefferies & Company 02 99.4%
  • Goldman Sachs 19 98.8%
  • Harris Williams & Co. New 98.3%
  • Lazard Freres 02 97.7%
  • JPMorgan Chase 03 97.1%

Overall Employee Satisfaction

April 2024 Investment Banking

  • Harris Williams & Co. 18 99.4%
  • JPMorgan Chase 10 98.8%
  • Lazard Freres 05 98.3%
  • Morgan Stanley 07 97.7%
  • William Blair 03 97.1%

Professional Growth Opportunities

April 2024 Investment Banking

  • Lazard Freres 01 99.4%
  • Jefferies & Company 02 98.8%
  • Goldman Sachs 17 98.3%
  • Moelis & Company 07 97.7%
  • JPMorgan Chase 05 97.1%

Total Avg Compensation

April 2024 Investment Banking

  • Director/MD (5) $648
  • Vice President (19) $385
  • Associates (87) $260
  • 3rd+ Year Analyst (14) $181
  • Intern/Summer Associate (33) $170
  • 2nd Year Analyst (66) $168
  • 1st Year Analyst (205) $159
  • Intern/Summer Analyst (146) $101
notes
16 IB Interviews Notes

“... there’s no excuse to not take advantage of the resources out there available to you. Best value for your $ are the...”

Leaderboard

1
redever's picture
redever
99.2
2
Betsy Massar's picture
Betsy Massar
99.0
3
Secyh62's picture
Secyh62
99.0
4
BankonBanking's picture
BankonBanking
99.0
5
kanon's picture
kanon
98.9
6
CompBanker's picture
CompBanker
98.9
7
dosk17's picture
dosk17
98.9
8
GameTheory's picture
GameTheory
98.9
9
DrApeman's picture
DrApeman
98.8
10
Jamoldo's picture
Jamoldo
98.8
success
From 10 rejections to 1 dream investment banking internship

“... I believe it was the single biggest reason why I ended up with an offer...”