AuthorTopic: Free Cash Flow - How to calculate it?
mathes
@2008-03-23 11:20:53
FCF = EBIT(1-tax rate) + D&A - CapEx - Net Working Capital

or

NI + dep/amortization - CapEx - NWC

so, the question is, why is EBIT(1-t) used in one case and NI in the other?
chichibaba
@2008-03-26 23:33:28
The first equation is more theoratically correct. You are measuring cash flow availiable to all providers of capital after operating expense and other necessary investments. You take out interest because they are a form of cash flow to debt holders, not an operating expense.

The second equation is just easier to pull from financial statements, as you don't have to add back the after-tax affect of interest.

CFA Discussion Topic: Free Cash Flow - How to calculate it?

To post a new topic or reply to a topic, please log in or register for a free user account.

I just wanted to share the good news that I passed CFA Level I!!! Thank you for your help - I think the online question bank helped cut the clutter and made a positive difference.
Edward Liu

Edward Liu