**
7.7 EBIT Form of FCFF**

Free Cash Flows can be computed in a variety of equivalent ways.
One way is directly from the Non US GAAP number Earnings
Before Interest and Taxes (EBIT).
For this method the following notation is again used:

FCFF = Free Cash Flow to the Firm

NI = Net Income after Tax

EBIT = Earnings Before Interest and
Taxes

CFO = Cash Flows from Operating
Activities

DA = Depreciation and Amortizations

ONCI = Other Non-Cash Items

ΔWC = Change in Working Capital
(itemized in the Cash Flow Statement)

This is simple because of the
relationship between EBIT and Net Income:

NI = (EBIT – Interest Expense)*(1 – Tax
Rate)

tc =
Effective Tax Rate

CAPEX = Capital Expenditure

**
Calculating
FCFF from EBIT**

EBIT is related to cash flows from operations (CFO), as measured
under US GAAP, as follows:

CFO = NI + DA + ONCI – ΔWC = (EBIT –
Interest)*(1 – Tax Rate) + DA + ONCI - ΔWC

Substituting into FCFF and cancelling out the Interest*(1 – Tax
Rate) terms we get:

FCFF = CFO + Interest*(1-tc) – CAPEX

FCFF = (EBIT – Interest)*(1 – Tax Rate)
+ Interest*(1-tc) +
DA + ONCI + - ΔWC – CAPEX

CAPEX can be computed directly from the Investing Activities
section of the Cash Flow Statement or it can be computed indirectly
by reconciling the change in real assets for the period in terms of
Depreciation expense and CAPEX such that, CAPEX equals change in
real assets plus Depreciation.