To get Unlevered FCF, which items are added back/subtracted?

To get Unlevered FCF, which items are added back/subtracted?

• A. Add back tax-adjusted Interest Expense and subtract tax-adjusted Interest Income
• B. Subtract Depreciation and Add back Capital Expenditures
• C. Add Net Income and Subtract Dividends
• D. Subtract Change in Working Capital and Add back CapEx

Answer: (A)

Unlevered Free Cash Flow is cash generated by the business available to all capital providers, before any financing decisions. To get it from net income, you need to remove the effects of financing. That means adding back the after-tax cost of debt (interest expense, adjusted for taxes) and subtracting the after-tax impact of interest income, so financing activity no longer distorts the cash flow figure. In practice, this is the reasoning behind adding back tax-adjusted Interest Expense and subtracting tax-adjusted Interest Income. Depreciation is a non-cash charge you would typically add back, and cash outlays like CapEx and changes in working capital are subtractions, so the other options don’t fit the standard adjustment pattern.

Unlevered Free Cash Flow is cash generated by the business available to all capital providers, before any financing decisions. To get it from net income, you need to remove the effects of financing. That means adding back the after-tax cost of debt (interest expense, adjusted for taxes) and subtracting the after-tax impact of interest income, so financing activity no longer distorts the cash flow figure. In practice, this is the reasoning behind adding back tax-adjusted Interest Expense and subtracting tax-adjusted Interest Income. Depreciation is a non-cash charge you would typically add back, and cash outlays like CapEx and changes in working capital are subtractions, so the other options don’t fit the standard adjustment pattern.