I've noticed that there some conflicting formulas for FCF (unlevered), which one is correct?
Start with NI:
FCF = NI + D&A - change NWC - CapEx
Start with EBIT:
FCF = EBIT - taxes + D&A - change NWC - CapEx
These seem to be conflicting because interest is subtracted to get NI, while interest remains in EBIT. I believe that interest(1-t) should be added back to the first formula because interest expense is not to be included in FCF, is this correct?
Then, is Levered FCF = FCF - interest expense?
I am interviewing right now and am confused. Thanks for any help!
Levered FCF = CFO - CapEx
Unlevered FCF = EBIT - Taxes + non cash charges - change in working capital requirements - CapEx
The difference between levered and unlevered is that Levered FCF takes into account interest income/interest expenses.
How does that levered formula take into account debt repayment?
in interviews, just use the unlevered free cash flow formula and you're set:
from the top: Revenues - COGS (excl. D&A) = Gross Margin - Operating expenses = EBITDA - D&A = EBIT - EBIT * (1-tax rate) = NOPAT + D&A - CapEx - Increase in NWC = Unlevered Free Cash Flow - Debt Payments (interest, principal) = Levered FCF
Usually in interviews I'll just start at EBIT if they want the formula, but you also want to be able to explain the concepts as well
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