1. Calculating UFCF Walkthrough
Okay. Hopefully that wasn't too challenging, but as I mentioned, we will
go through this together and you can feel pretty good about yourself if
your unlevered free cash flows under each of the three methodologies,
if they all equaled. But we'll work through it together.
So we'll start using the EBIT methodology, so we'll just reference reference
EBIT up above, then we have unlevered taxes, so that's already a negative
number, again, we call them unlevered taxes because we're using EBIT
and interest is normally tax deductible, so in effect, what we're doing,
we're assuming that there is no debt financing
in this company's capital structure, so these would be...
This would be the tax amount that the company would pay if it
had no interest, remember that's important for an unlevered DCF,
and we can sum those up again, one of the best shortcuts alt
equals is your auto sum, and we get net operating profit after taxes
or NOPAT now, you don't have to have a road for NOPAT in
there. We decided to include that because NOPAT is a very common calculation,
we just need to be careful though, that when we actually sum up
the unlevered free cash flows using this methodology,
that we only capture NOPAT and the adjustments beneath it. We don't want
to include EBIT or the unlevered taxes, otherwise we will mis calc. We
want to add back our depreciation, which is up here,
then we have our capital expenditures or CapEx investment, it's already
a negative, it's a cashed outflow and that we have our changes in
working capital. Again, it's a cash outflow in this case,
and what we'll do, we'll just do a sum,
and again, we just want to go through NOPAT. So
our formula is NOPAT plus depreciation, less our reinvestment in the business,
the reinvestment being capital expenditures and working capital.
Now that we have that one, you're done,
we can select that column, copy it out to the right using CTRL R
for fill right. Now, let's calculate unlevered free cash flows using the
net income method. So we'll start with net income. Again, we can just
reference that from above. Depreciation, of course, a non cash expense that
we add back... And here's where it gets a little different.
Net income is a levered metric, Remember, net income is after interest expense,
it's after taxes. So in order to convert net income to an unlevered
metric, we have to add back the after tax interest expense,
which we have already calculated up above, and then the rest is the
same, we need to capture our re investments or our capital expenditures
and our change in working capital. Now here we can use auto sum,
so again, Alt equals, select our data, select out to 2027,
CTRL R to fill right. And now we can calculate unlevered free cash
flows using EBITDA, and we cover this methodology more in our DCF
modeling course, but either way, you start with EBITDA...
Obviously, if you start with EBITDA, you do not need to add back
depreciation and amortization, we can pull in our unlevered taxes,
which we calculated off of EBIT, so our unlevered tax number is correct.
We need to pull in CapEx and changes in working capital.
Once again, will auto sum, select our data. And fill to the right.
2. Let's practice!