Adding back depreciation to free cash flow from EBITDA
Hi all,
I'm trying to calculate unlevered free cash flow to the firm, starting with EBITDA
The formula I have is fcff= EBITDA*(1-t)+D&A +/- WC changes – Capital expenditures
What I want to know is, should we be multiplying D&A by the tax rate before adding it in?
I understand that we have to add back D&A because they don't represent a real outflow of cash. But if we are given the income without D&A subtracted, do we just add the amount of tax the depreciation would have saved?
Thanks!
It's EBIT*(1-T) to get to NOPAT.
You could technically use EBITDA*(1-T) and add back the amount of tax saved instead of the full D&A to get the same answer right?
By using the formula you are using you are getting taxes paid on the basis of EBITDA. You could use the formula if EBITDA - Taxes (Based on EBIT) - CapEx +- Working Capital Requirements.
You are basically adding D&A twice which is wrong. Remember you want to add it because you want to know what are the real cash flows available to both investors. As D&A is a non cash expense you add it but just once.
To be honest, use the standard formula. You will be better off explaining the rationale in interviews and you will be wrong many less times.
EBIT(1-T) + D&A - CapEx +- Working Capital Requirements.
Cheers
Agreed
Just to add, that the FCF does not take into account the interest expense. That is because you usually embed the (post-tax) cost of debt into your WACC. However, if you were trying to see the actual cash a company generates - say - in an LBO, do not forget to also subtract the post-tax net interest expense
Cheers
thanks for the clarification on LBO modelling
cheers
Correct on the formula, but remember that it's the change in working capital and not working capital itself that is netted out.
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