I've been confused for a while but basically I'm not understanding why we use EBIT(1-T) which derives to Net Income + Interest (1-T) instead of just Net Income + Interest. Why are we removing the effects of the interest tax shield?
| +156 | How to stop feeling like shit for not making it in IB? | 57 | 11h | |
| +117 | If Tik Tok is forced to sell, what banks do you think would be involved in the deal? | 58 | 9h | |
| +81 | Updated LA Banking Scene (2024) | 60 | 2s | |
| +38 | Ranking banks that went under | 20 | 16h | |
| +37 | Burnt Out M&A ASO | 18 | 13h | |
| +35 | Relevance of A-Levels for U.K. London recruiting | 24 | 1h | |
| +32 | A strategy for SA applicants late to the game like myself | 15 | 21h | |
| +27 | Series 79 Help / Tips to Pass The First Attempt | 11 | 2d | |
| +26 | Intern Ettiquette | 4 | 1d | |
| +23 | What are hours like at BBs in London? | 47 | 22h |
Career Resources
Get instant access to lessons taught by experienced private equity pros and bulge bracket investment bankers including financial statement modeling, DCF, M&A, LBO, Comps and Excel Modeling.
Unlevered FCF = cash the business has before paying its financial obligations. Accordingly, EBIT(1-T), also known as Net Operating Profit after Tax (NOPAT), is a measure of profit that excludes the costs and tax benefits of debt financing. For avoidance of doubt: EBIT(1-T) = earnings before interest and taxes (EBIT) adjusted for the impact of taxes = NOPAT.
Answers below are all incomplete
Tax shield is included in WACC calculation by effectively reducing CoD. This way we can model a stable gearing going forward which would be pretty hard if you were to make a 3 statement model and had to guess how much debt you had to issue to achieve this.
Unlevered means no debt. No debt means no interest. No interest means no interest tax shield.
About as good as an explanation will get...
If unlevered FCF assumes no tax shield from tax, why does the corresponding WACC assumes leverage and tax shield (1-T) from debt?
Because we are not adding the tax benefit of debt to the cash flows (numerator), so we must do it through the discount rate (denominator) by taking the a/t cost of debt. It has to be one or the other, but not both as that will lead to double counting.
unlevered FCF is the amount of CF available to all investors, inc. both debt and equity. so you need to take into consideration the cost of both types of capital.
Veniam temporibus consequatur veritatis velit voluptatem voluptates. Est officia id aut facilis repellat non. Accusantium consequatur qui veniam saepe quam qui.
Aliquid et praesentium reprehenderit ut totam. Magni ipsa eum reprehenderit sint ipsam animi excepturi.
Iste accusantium molestiae aut placeat saepe at. At dolorum et velit. Dolorum eveniet omnis provident et quos alias. Labore libero blanditiis minima id officia laborum enim reprehenderit.
Odio cum rem reprehenderit sapiente adipisci adipisci alias. Deserunt et est soluta est reiciendis suscipit repellat quia. Voluptatem accusantium assumenda libero dignissimos.
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...