What is the reasoning behind using EBIAT instead of EBIT in deriving unlevered FCF in a DCF?
[EBIT - taxes at the marginal tax-rate =EBIAT +D&A -Capex
= unlevered FCF]
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Tax expense affects the amount of cash available to investors, specifically equity investors, because taxes are expensed before any remaining profit can be distributed as dividends. Unlevered FCF reflects the amount of cash available to all investors, and so has to include tax expense in its calculation.
Never knew it was called EBIAT, always known it as NOPAT
Some people also use “Tax-Effected EBIT”
NOPAT is different than EBIAT tho
[replied in the wrong spot]
Total tax effect is split in 2: - Tax effect of capital structure is incorporated in your discount rate (positive effect on value, lowers cost of debt -> lower WACC -> higher EV) - The tax from EBIT to NOPAT is the tax on the business cash flows and overstates tax expense because of the above (tax expense up -> FCF down -> EV down)
Why does it overstate the tax effect? Because you apply a tax rate pre-interest?
Exactly: actual interest charge would be lower given interest expense. But that effect is in the discount rate by lowering the cost of debt by this effect.
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