Hi everyone:
This might be a dumb question, but I'm stuck on it and would really appreciate your help.
I'm reading both Breaking Into Wall Street and WSO PE guide, and it seems that they have two formula for FCF calculation that don't 100% tie up. I wanted to check if I misunderstood them...
From BIWS: FCF = CFO - capex From WSO PE guide: FCF = EBIT (1- tax rate) + D&A+ net change in working capital - capex
If these two would be the same, then CFO would need to equal EBIT (1-tax rate) + D&A + net change in working capital. BUT, my understanding is that CFO = net income + D&A + net change in working capital, and net income = EBT (1- tax rate), not EBIT (1-tax rate)
Could some one please enlighten me on this?
Thanks!
The first is levered free cash flow, and takes the company’s capital structure (debt and resulting interest expense) into account, which is primarily used in LBOs to see if a company’s profitability / cash flows can support certain debt levels. The second is unlevered and does not take interest into account, which is more commonly used in Equity valuation as it gives an “apples to apples” comparison across various businesses operations
The first is levered free cash flow, and takes the company’s capital structure (debt and resulting interest expense) into account, which is primarily used in LBOs to see if a company’s profitability / cash flows can support certain debt levels. The second is unlevered and does not take interest into account, which is more commonly used in Equity valuation as it gives an “apples to apples” comparison across various businesses operations
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