Interest in unlevered cash flow
Is interest kept out of FCFF? Synthetic packet: revenue 1,000, COGS 600, opex 250, depreciation 40, interest 20, tax 25%, capex 60, working capital +30 (USD m).
MO
4/4 checks| Revenue | input | 900.0 |
| Cost of goods sold | input | 540.0 |
| Cash operating expenses | input | 250.0 |
| Depreciation | input | 40.0 |
| Interest expense | input | 20.0 |
| Tax rate | input | 25% |
| Capital expenditure | input | 60.0 |
| Increase in working capital | input | 30.0 |
| EBIT | =revenue-cogs-opex-dep | 70.0 |
| NOPAT | =ebit*(1-tax) | 52.5 |
| FCFF | =nopat+dep-capex-dwc | 2.5 |
- Pass · Initial FCFF equals the source packet2.5
- Pass · Working capital +20 flows through to FCFF-17.5
- Pass · Interest expense does not change unlevered FCFF2.5
- Pass · Revenue −10% with variable COGS updates FCFF-24.5
Sample analyst
0/4 checks| Revenue | input | 900.0 |
| Cost of goods sold | input | 540.0 |
| Cash operating expenses | input | 250.0 |
| Depreciation | input | 40.0 |
| Interest expense | input | 20.0 |
| Tax rate | input | 25% |
| Capital expenditure | input | 60.0 |
| Increase in working capital | input | 30.0 |
| EBIT | =revenue-cogs-opex-dep | 70.0 |
| NOPAT | =(ebit-interest)*(1-tax) | 37.5 |
| FCFF | =nopat+dep-capex-dwc | -12.5 |
- Fail · Initial FCFF equals the source packet-12.5 vs 2.5
- Fail · Working capital +20 flows through to FCFF-32.5 vs -17.5
- Fail · Interest expense does not change unlevered FCFF-50.0 vs 2.5
- Fail · Revenue −10% with variable COGS updates FCFF-39.5 vs -24.5
Subtracting interest mixes levered and unlevered cash flow. FCFF should not move when interest changes.