I have seen that NOPAT = operating income x (1 - tax rate) However, since Operating Income is the same as EBIT, by removing tax from EBIT, it means we are still left with EBI. But EBI is not equal to NOPAT? Can someone please clarify this.

As EBI is not a standard term, how do you propose to calculate it? Taxed earnings before taxed interest? Taxed earnings before untaxed interest? Something else?

(To me, ebi is shrimp sashimi, which is infinitely more enjoyable than discounted cash flow models.)

Sorry s2000, this still isn’t clear. I understand that Earnings before Interest (EBI) is not a standard term, so i’m unsure why they have NOPAT = EBIT*(1-Tax rate), when EBIT*(1-tax rate) =EBI.

EBIT(1-Tax) gives you EBI however, it adjusts for the actual cash taxes paid on interest. Whereas EBI on the I/S would not account for the taxes paid on interest. Therefore, EBIT(1-T) or NOPAT is a levered figure, and helps us when we are calculating EVA.

Remeber EVA is NOPAT or EBIT(1-t) * $WACC. If we are going to have a WACC charge, then we need to make sure we charge this to the total amount of capital available to debt and equity holders. Which like in the FCFF calculations adds back the the interest, but not the tax benefits from the interest.

I believe this is the right way to think of this.

Let’s throw some numbers in here. Suppose that:

- EBIT is $100
- Interest expense is $20
- Tax rate is 40%

Then:

- EBT = $80 (= $100 – $20)
- Tax expense = $32 (= $80 × 40%)
- Net income = $48 (= $80 – $32)
- NOPAT = $60 (= $100 × 60% = $100 × (100% – 40%))

The reconciliation of NOPAT (what you’re calling EBI) to Net income is:

EBI – Net Income = $60 – $48

= $12

= $20 × 60%

= Interest expense net of taxes

So EBI means (Taxed) Earnings Before (Taxed) Interest.

thanks s2000

My pleasure.