Which of the following represents the Unlevered Free Cash Flow (UFCF) formula?

Which of the following represents the Unlevered Free Cash Flow (UFCF) formula?

• A. EBIAT + D&A +/- Noncash Items - Working Capital - Capex
• B. Net Income + D&A - Capex
• C. EBIT + D&A - Taxes - Capex
• D. EBITDA - Taxes - Capex

Answer: (A)

Unlevered Free Cash Flow shows the cash a business generates that is available to all investors, before any debt financing decisions. To get it, you start with operating profit after tax (EBIAT or NOPAT), add back noncash charges like depreciation and amortization (and any other noncash items), and then subtract the cash needed for changes in working capital and for capital expenditures. That structure is what the option reflects: EBIAT plus D&A (and other noncash adjustments), minus Working Capital and Capex. The result is cash flow generated by operations that is available to both debt and equity holders, independent of leverage. In contrast, using net income includes financing effects (interest), and using EBITDA ignores taxes and capex, so they don’t represent the cash available to all capital providers.

Unlevered Free Cash Flow shows the cash a business generates that is available to all investors, before any debt financing decisions. To get it, you start with operating profit after tax (EBIAT or NOPAT), add back noncash charges like depreciation and amortization (and any other noncash items), and then subtract the cash needed for changes in working capital and for capital expenditures. That structure is what the option reflects: EBIAT plus D&A (and other noncash adjustments), minus Working Capital and Capex. The result is cash flow generated by operations that is available to both debt and equity holders, independent of leverage. In contrast, using net income includes financing effects (interest), and using EBITDA ignores taxes and capex, so they don’t represent the cash available to all capital providers.