Why use EBIAT instead of EBIT in deriving unlevered FCF
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
-Change in NWC
= unlevered FCF]
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.
Voluptatibus distinctio reiciendis distinctio ab provident neque earum. Quam eaque perferendis amet voluptatibus ut. Autem dolorum repudiandae voluptas dolorem veniam laudantium. Ut distinctio in est aspernatur a voluptatem error. Voluptatibus vel qui reprehenderit saepe. Unde dolore nulla quis facilis earum tempora fugit ducimus.
Hic debitis modi et possimus odit. Asperiores rerum voluptas reprehenderit ipsa debitis voluptatem. Eius eos est libero sed omnis reiciendis fuga. Minus nobis nobis corporis et culpa.
Odit quod sit nobis quibusdam facere. Fugit est voluptatem excepturi dolorem distinctio reiciendis asperiores. Accusamus at deserunt sit sit sequi voluptas. Sapiente nesciunt nulla aut.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...