|Author||Topic: Free Cash Flow - How to calculate it?|
|FCF = EBIT(1-tax rate) + D&A - CapEx - Net Working Capital
NI + dep/amortization - CapEx - NWC
so, the question is, why is EBIT(1-t) used in one case and NI in the other?
|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.