Module II· DCF — Mechanics & FCFIntermediate
Question
Why do you calculate taxes in UFCF on EBIT, not on EBT?
Answer
Mechanics
UFCF is 'unlevered' — it values the operating business independently of the capital structure. Interest is a financing item, so it does not belong in operating cash flow. If you calculated taxes on EBT (i.e. EBIT − interest), you would build in the tax shield on interest — but the WACC already captures that through (1 − t) × cost of debt. Double-counting.
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Consequence
NOPAT = EBIT × (1 − t), and the tax shield enters the model only through the WACC. A classic junior mistake in interviews.