net of PIK interest, interest income, amortization of OIDs, etc.). They are fairly self-explanatory: cash taxes are the taxes that the company paid in cash for the period (as opposed to the income tax expense for GAAP purposes) and cash interest expense is the interest that the company paid in cash for the period (i.e. I think that the formula "investors use" that you're talking about refers to more of an OCF metric, though it is, indeed, sometimes labeled FCF.Īs for calculating cash taxes and cash interest expense, I don't understand what you mean by "actual formulas". The deduction of interest expense in the 2nd method above implies a calculation of levered FCF, though there is no adjustment for changes in the debt's principal. What is the difference between these two methods? How does one calculate a firm's "cash taxes" and "cash interest expense" (actual formulas would be helpful here). However, I often see investors calculating FCF as follows: EBITDA - Capex - Cash taxes - Cash interest expense.
#Free cash flow formula from ebitda how to#
Nycvalue:I would greatly appreciate any help on how to think about the following more accurately:Īt b-school, I was taught to calculate FCF as follows: EBIT*(1-t) + D&A - Capex - changes in NWC. Pointless learning to model by rigidly using Unlevered FCF -> Levered FCF, only to get stomped by models in your group using Operating FCF -> FCF -> Net Cash Flow FCF definitions and usage is whatever your group wants it to be. In any case, if you can practice modelling before your summer, do so, but don't waste time trying to learn rigid definitions. otherwise you will perpetually be referring to templates and will never learn how to make a model fit whatever situation you're modelling for. When prepping for interviews, it may be useful to memorize formulas, but when modelling, its better to understand what it actually means as that makes it easier to decide where every number goes. taxes, interest expense, interest income, debt amortisation, debt issuance/drawdown, dividends, equity issue proceeds, share buybacks etc)įCFF = Unlevered FCFFCFE = FCFF excluding equity payments and funding (so the above excluding dividends, equity issue proceeds, share buybacks etc) Unlevered FCF = cash flow excluding costs, sources, and effects (e.g. Why would you add back D&A to EBITDA? EBITDA already excludes D&A. There are other/faster ways to do it:Īm honestly surprised about how these interviewers didn't know how to do it via #1 and #3, but hope this is useful for anyone who is asked this question in the future.Īm honestly surprised about how these interviewers didn't know how to do it via #1 and #3, but hope this is useful for anyone who is asked this question in the future.The interviewers told you that you were wrong because you were actually wrong (at least for method 3). Seems like some interviewers only know how to do this calculation when starting from EBIT and need to work backwards / forwards to get to EBIT as a starting point - see #2 below. I want to clarify this to all potential candidates (and interviewers who read this): there is more than one way to calculate FCFF, depending on your starting point. Both times interviewers said I was wrong and it just pissed me off especially when you know it's not a stress test - they genuinely thought I was wrong. Had 6 ib interviews recently and twice I was asked how to calculate FCFF from various starting points (one from Net Income, other from EBITDA).
#Free cash flow formula from ebitda free#
Unlevered Free Cash Flow - Interviewers Are Clueless ( Originally Posted: )
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