Final answer:
Unlevered Free Cash Flow (UFCF) is the cash available to all investors before considering financial leverage, and it can be calculated in three main ways: using net income, EBIT, or EBITDA, after making adjustments for non-cash expenses, taxes, capital expenditures, and changes in working capital.
Step-by-step explanation:
Unlevered Free Cash Flow (UFCF) refers to the cash flow available to all investors in a company, both equity and debt holders, before accounting for financial leverage (debt). It represents the underlying cash generating efficiency of a business, excluding the impact of its capital structure.
Three ways to calculate UFCF are:
- Net Income + Non-Cash Expenses + Interest Expense x (1 - Tax Rate) - Capital Expenditures - Working Capital Changes: This method starts with net income and adds back non-cash expenses and after-tax interest, then subtracts capital expenditures and the change in working capital.
- EBIT + Non-Cash Expenses - Taxes - Capital Expenditures - Working Capital Changes: This approach begins with earnings before interest and taxes (EBIT), then adds non-cash expenses, subtracts taxes paid, capital expenditures, and the change in working capital.
- EBITDA - Taxes - Capital Expenditures - Working Capital Changes: It simplifies the calculation by using earnings before interest, taxes, depreciation, and amortization (EBITDA), then deducts taxes, capital expenditures, and the change in working capital.
Each method provides an angle for evaluating the cash flows independently from the company's financing decisions, allowing for a comparison on operational efficiency grounds.