How do I calculate FCFF starting from EBITDA?

Question

AcadiFi · Accepted Answer

FCFF (Free Cash Flow to the Firm) represents cash available to all capital providers — both debt and equity holders — after reinvestment. Starting from EBITDA is one of the cleanest approaches.

**FCFF from EBITDA Formula:**

> FCFF = EBITDA x (1 - t) + Dep x t - CapEx - Change in Working Capital

Or equivalently:

> FCFF = EBITDA - Taxes on EBIT - CapEx - Change in WC
> FCFF = EBITDA - [EBITDA - Dep] x t - CapEx - Delta WC

```mermaid
graph TD
    A["EBITDA"] --> B["-Taxes on EBIT
= (EBITDA - Dep) x t"]
    B --> C["-Capital Expenditures"]
    C --> D["-Change in Working Capital"]
    D --> E["= FCFF"]
    style A fill:#c9a84c,color:#000
    style E fill:#10b981,color:#fff
```

**Why this works:**
- EBITDA is before depreciation, interest, and taxes
- We need to subtract taxes, but only on **operating income (EBIT)**, not on EBITDA. Since EBIT = EBITDA - Dep, taxes = (EBITDA - Dep) x t
- The depreciation tax shield (Dep x t) effectively gets added back
- CapEx and working capital investment represent cash reinvested in the business

**Worked Example — Crestline Industrial:**

| Item | Amount ($M) |
|---|---|
| EBITDA | $240 |
| Depreciation & Amortization | $50 |
| Tax rate (t) | 25% |
| Capital expenditures | $70 |
| Change in working capital | +$15 (increase = cash outflow) |

**Step 1:** Calculate taxes on EBIT
- EBIT = $240 - $50 = $190
- Taxes on EBIT = $190 x 0.25 = $47.5

**Step 2:** Compute FCFF
- FCFF = $240 - $47.5 - $70 - $15 = **$107.5 million**

**Verification from Net Income:**

Let's cross-check using the NI approach. Assume interest expense = $20M.
- EBT = $190 - $20 = $170
- Tax = $170 x 0.25 = $42.5
- Net Income = $127.5

FCFF from NI:
- FCFF = NI + Dep + Int x (1 - t) - CapEx - Delta WC
- FCFF = $127.5 + $50 + $20 x (0.75) - $70 - $15
- FCFF = $127.5 + $50 + $15 - $70 - $15 = **$107.5** (matches)

**All Starting Points for FCFF:**

| Starting Point | Formula |
|---|---|
| EBITDA | EBITDA(1-t) + Dep(t) - CapEx - Delta WC |
| EBIT | EBIT(1-t) + Dep - CapEx - Delta WC |
| Net Income | NI + Dep + Int(1-t) - CapEx - Delta WC |
| CFO | CFO + Int(1-t) - CapEx |

**Exam tips:**
- Interest is added back because FCFF is before financing costs. Always add Int x (1-t), not the full interest.
- Working capital increases consume cash (positive delta WC is subtracted)
- If depreciation is given separately from amortization of intangibles, both should be added back
- Watch for non-cash charges like impairments — these should be added back to FCFF

Practice FCFF calculations with our CFA Level II equity question bank.

How do I calculate FCFF starting from EBITDA?

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Related Questions

Practice Questions

Item	Amount ($M)
EBITDA	$240
Depreciation & Amortization	$50
Tax rate (t)	25%
Capital expenditures	$70
Change in working capital	+$15 (increase = cash outflow)

Starting Point	Formula
EBITDA	EBITDA(1-t) + Dep(t) - CapEx - Delta WC
EBIT	EBIT(1-t) + Dep - CapEx - Delta WC
Net Income	NI + Dep + Int(1-t) - CapEx - Delta WC
CFO	CFO + Int(1-t) - CapEx