In the Unlevered FCF steps, after calculating EBIAT you should:

In the Unlevered FCF steps, after calculating EBIAT you should:

• A. Add back D&A, Changes in WC, Non-recurring expense
• B. Subtract CapEx
• C. Subtract Taxes
• D. Add back interest

Answer: (A)

The idea being tested is how to turn the operating profitability measure after taxes into cash flow that’s available to all providers of capital. When you have EBIAT (earnings before interest and after taxes), you’re starting from a figure that already accounts for taxes but still reflects accounting charges that don’t consume cash, and it may include one-off items that aren’t part of normal operations. D&A (depreciation and amortization) are non-cash charges. They reduce reported earnings but don’t actually use cash in the period, so you add them back to EBIAT to recover the real cash flow. Changes in working capital capture the cash impact of operating assets and liabilities like inventories, receivables, and payables. If working capital increases, the firm ties up cash; if it decreases, cash is freed. You adjust for this to reflect the true cash movement, not just the accrual-based profit. Including this adjustment helps ensure the unlevered FCF picture reflects how much cash the business actually generates from its operations. Non-recurring expenses are one-off costs that reduce earnings but aren’t expected to repeat. Adding them back helps normalize cash flow to a level that better represents ongoing operating performance, which is the goal of unlevered FCF. After making these adjustments to EBIAT, you would typically proceed to subtract capital expenditures and account for net changes in working capital as the next steps to arrive at unlevered free cash flow.

The idea being tested is how to turn the operating profitability measure after taxes into cash flow that’s available to all providers of capital. When you have EBIAT (earnings before interest and after taxes), you’re starting from a figure that already accounts for taxes but still reflects accounting charges that don’t consume cash, and it may include one-off items that aren’t part of normal operations.

D&A (depreciation and amortization) are non-cash charges. They reduce reported earnings but don’t actually use cash in the period, so you add them back to EBIAT to recover the real cash flow.

Changes in working capital capture the cash impact of operating assets and liabilities like inventories, receivables, and payables. If working capital increases, the firm ties up cash; if it decreases, cash is freed. You adjust for this to reflect the true cash movement, not just the accrual-based profit. Including this adjustment helps ensure the unlevered FCF picture reflects how much cash the business actually generates from its operations.

Non-recurring expenses are one-off costs that reduce earnings but aren’t expected to repeat. Adding them back helps normalize cash flow to a level that better represents ongoing operating performance, which is the goal of unlevered FCF.

After making these adjustments to EBIAT, you would typically proceed to subtract capital expenditures and account for net changes in working capital as the next steps to arrive at unlevered free cash flow.