5.2·8 min read
Building UFCF, Line by Line
Tax-affect EBIT, add back D&A, subtract CapEx, then adjust for the change in working capital. Five lines, one number.
By the end you can
- ✓Construct UFCF from an income statement and a few cash items
- ✓Apply the marginal tax rate to EBIT (not net income)
- ✓See how each line maps to real cash
The build is a fixed recipe. Walk it slowly once and it becomes automatic.
- Tax-affect EBIT: multiply by (1 - ). This gives the after-tax operating profit as if the company had no debt - that's the 'unlevered' part.
- Add back D&A: it was subtracted to get but isn't a cash outflow.
- Subtract CapEx: the real cash spent on property, plant, and equipment.
- Subtract the increase in net working capital (ΔNWC): cash tied up in running the business as it grows.
- Result = UFCF.
Tax-affect EBIT, not net income
We apply the marginal tax rate to - not to net income, and not at the effective rate. This deliberately ignores the interest tax shield, because the tax benefit of debt is captured inside WACC (the after-tax ). Taxing directly avoids double-counting that benefit.
Worked example · One year of UFCF
Given
- •: $200mm
- •: 21%
- •: $40mm
- •: $50mm
- •Increase in : $15mm
Solution
- 1.Tax-affect
- 2.Add , subtract and Δ
Answer
= $133mm. Notice the increase in working capital is a drag - that cash is locked up in the business, not available to investors.
Check yourself
Why do we tax-affect EBIT instead of using net income's tax figure?
Practice in the simulator
Lock it in by building it yourself in a live, graded spreadsheet.