Module II· DCF — Mechanics & FCFBasic
Question
How do you calculate unlevered free cash flow (UFCF)?
Answer
Formula
```
UFCF = EBIT × (1 − t) + D&A − Capex − ΔNWC
= NOPAT + D&A − Capex − ΔNWC
```
Example
Inputs:
- EBIT: $100m
- Tax rate t: 30%
- D&A: $20m
- Capex: $25m
- ΔNWC: $5m
Calculation:
```
NOPAT = EBIT × (1 − t) = $100 × 0.70 = $70m
UFCF = NOPAT + D&A − Capex − ΔNWC
= $70 + $20 − $25 − $5 = $60m
```
Why 'unlevered'
UFCF is measured before interest payments and belongs to all capital providers — it is discounted at the WACC, not the cost of equity.
Careful
Tax on EBIT, not on (EBIT − interest) — otherwise you double-count the tax shield.