FCFF from EBITDA
Hello everyone,
I wanted to confirm how we can calculate FCFF from EBITDA as I have seen different formulas and I am still confused.
1) EBITDA - D&A = EBIT we then subtract the cash taxes and then we add back pre-tax D&A since its a non-cash expense but it is tax-deductible, we then subtract/add changes in net working capital and CapEx
2) FCFF = (EBITDA – Interest) *(1 – Tax rate) + Interest*(1 – Tax rate) – Capex + Changes in WC.
Am I confusing my self or is 1 the right way?
Thanks!
First formula is standard. Not sure where the second one is from, if you expand the first term it simplifies to EBITDA - CapEx + Changes in NWC (btw WC should be subtracted), which is wrong because you don't factor in tax payments.
1 is right but a bit convoluted, the way I always did it was EBIT x (1-tax rate) + non cash expenses - capex & changes in NWC.
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