FCFF from EBITDA when EBITDA is negative

CFA Level II
#1

Hi guys,

I have a question regarding the FCFF from EBITDA when EBITDA is already negative.

The conventional formula for FCFF equals

FCFF= EBITDA(1-tax rate) - Depr(tax rate)-FCInv-Change in WC

If EBITDA is already negative my assumption is that the formula changes as no taxes are paid

FCFF=EBITDA-FCInv-Change in WC

Is this logic correct? What are your views?

Best regards…

#2

Hi TheHans,

The logic looks fine to me too.

Cheers.

#3

we should use original formula and use 0 for tax. But if our task is valuation, I think there are some better options.

1, simpliest, we don’t use fcff

2, use normalize version of fcff

3, make cash flow projection until fcff turns positive.

#4

Cheers mates. It was not for valuation purposes. So it works. Thanx

#5

I don’t think the formula changes… It simply means there may be a neg cash flow

#6

Should be plus dep(tax rate)