How do I calculate FCFF starting from EBITDA?

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

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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.