Confusion about cash flows
I found this paragraph a bit confusing: "Levered Cash Flow can be calculated a number of ways, but the two main ways are a) starting from EBITDA, and b) starting from Net Income. • The “starting from EBITDA” methodology begins by pulling the EBITDA line from the Operating Model, and subtracting from that the following line items: Capex, Interest, Taxes, and any increases in NWC. • The “starting from Net Income” methodology begins by pulling the Net Income line from the Operating Model, then adding back D&A, then subtracting Capex and any increases in NWC"
For a LBO we are looking for the levered free cash flow to pay down debt. The two methods above are supposedly equivalent, either top-down or bottom-up building.
In a DCF we look for the unlevered free cash flow which is EBIT(1-t)+DA -capex - change in NWC. I guess this is more of the top-down. To build from bottom up, would I use Net income, add taxes, add interest, add D&A?
Also, in DCF's unlevered why do we take taxes out and then add back DA whereas for the LBO we just start with EBITDA and then take out taxes? Are they equivalent? I have heard something about the math not working out with cash flows, in that you have an extra DA*t term due to tax deductibility due to interest or DA or something. Can someone clear this up please?
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