Hi,
I have in the book that “Because many noncash adjustments occur on the I/S below EBIT, we don’t need to adjust for them when calculating free cash flow if we start with EBIT”.
WHY? Can someone give an example.
As I see it is that u need to adjust for whatever non cash concept that affect free cash flow below ebit
Your question is a tad confusing as there are multiple FCF measures but the concept is that if you start with EBIT DA you have as pure as a cash-flow from operations figure as possible when specifically analzing the income statemnet.
As you move into Depreciation/Amortization expenses, you start seeing the impact from capitalized assets which is a non-cashflow measure.
For interest and Taxes, you need to include the impact from taxes before interest , in order to calculate FCFF succuessfully. Recall section from the calc. in FCFF= NI + [INT * 1 - T]
Im on a problem where:
Earnings before tax: 30,4
Incom taxes (current): 49,3
Income taxes (future): (71,1)
Net earnings: 52,2
You ha an unusual expense item of 189,1 and you are ask for underlying earninngs;
The answer is adjusted earnings before tax: 30,4 + 189,1 = 219,5
Adjusted earnings after tax = 219,5 * (1 - Tax Rate)
Does it make sense to you?