7.8 EBITDA Form of FCFF
EBITDA is Earnings Before Interest,
Taxes, Depreciation and Amortization.
It is a non US GAAP measure that is often used as an
approximation for cash flow from operations.
It is popular because it differs from cash flow from
operations under US GAAP by excluding interest and changes in
working capital. These
differences will become clear in the following reconciliation of
EBITDA and FCFF.
Free Cash Flow to the Firm can be derived from EBITDA as follows.
First, we note the differences between EBITDA and Net Income
are as follows:
NI = (EBITDA – DA -
Interest)*(1 – Tax Rate)
Therefore, EBITDA is related to cash flows from operations (CFO) as
follows:
CFO = NI + DA +
ONCI –
ΔWC = (EBITDA -DA -
Interest)*(1 – Tax Rate) + DA + ONCI –
ΔWC
ONCI is again Other Non-Cash Items and DA is depreciation and
amortization.
Canceling out the common DA terms to get:
CFO = (EBITDA – Interest)*(1 – Tax
Rate)+DA*Tax Rate + ONCI
–
ΔWC
Substituting into FCFF and cancelling out the Interest*(1 – Tax
Rate) terms we get:
FCFF = CFO + Interest*(1-tc)
– CAPEX = (EBITDA – Interest)*(1 – Tax Rate) + Interest*(1-tc)
+ DA*Tax Rate + ONCI -
ΔWC
– CAPEX
FCFF = EBITDA*(1-tc) + DA*Tax
Rate + ONCI -
ΔWC
– CAPEX
The above form allows FCFF to be
computed directly from EBITDA.