High Level DCF Question
When going from revenue to unlevered FCF in a DCF analysis, why do you estimate taxes without deducting interest expenses? Wouldn't the amount you're actually paying in taxes, and hence the amount by which your FCF decreases, reflect the percentage of your taxable income which has already deducted interest expense? From there, you could add back interest expense to get unlevered FCF.
Instead, most DCFs proceed like this: Revenue - COGS = Gross Profit - Operating Expenses = EBIT * (1-Tax rate). This final value is where you add back depreciation and other non-cash expenses, etc. Why does it not make sense to calculate FCF the way described in the first paragraph for an unlevered DCF?
You want to see the FCF that the company is able to generate from its leverage. Unlevered shows you the cash available to the debt and equity holder. That’s why you use NOPAT as opposed to what you’re saying, which is essentially Net Income. If you were using levered FCF, you want to reflect the cash available to the equity holder only
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