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Hi Sir,

The depreciation and amortization is actually added to EBITDA while DCF calculation?

Then why is it giving me a wrong answer when i choose that option..The answer its giving right is A&D should be subtracted from EBITDA which is wrong as you have taught us?

Thanks,

Narpath

The depreciation and amortization is actually added to EBITDA while DCF calculation?

Then why is it giving me a wrong answer when i choose that option..The answer its giving right is A&D should be subtracted from EBITDA which is wrong as you have taught us?

Thanks,

Narpath

Dec 24 2012 03:23 PM

ya the same confusion i had in this qustion and i have told binny sir he will lok at it look at to my post where i begin with i dont agree with you sir in discussion forum

Dec 24 2012 05:25 PM
If you are using EBITDA you neither need to add nor do you need to subtract D&A from it, where as if you are using EBIT then you will need to add back D&A.

This is what I understood, hopefully I am right and Mr. Binny would be able to clarify it better.

Dec 25 2012 02:41 PM
This is what I understood, hopefully I am right and Mr. Binny would be able to clarify it better.

i posted this against sir reply,honestly speaking i dont agree with your answer because the whole purpose for what d&a is considered to arrive at is to get free cash flow to discount it to arrive at E.V.

NOW EBITDA Means all cash derived(left) from operations of business after paying operating expense but from that we have not paid interest, tax, and d&a not yet deducted to get net income,

if we deduct d&a then also cash would remain same because d&a is book entry and we will arrive at EBIT,

NOW from this EBIT if we want to come at free cash flow we have to add back d&a to get actual cash flow, now from this capex during the year deducted and increase in working capital lessened, if decrease in w.c added to arrive at free cash flow.

so we saw above when we start from EBITDA we first less d&A and then afterwards add so effect is null, so there is no need to consider d&A when ebitda is given. but if question or facts given starts with EBIT(i.e earning before interest and tax but after deducting non cash d&a) then we add noncash expense d&a to arrive actual cash flow then we consider capex and w.c to arrive at free cash flow

i hope binny sir you got the point from above explanation am i right i want your reply asap

gnt. sir

this is the above explanation you can check for d& a treatment i hope i am correct, i am waiting sir response against above post

Dec 25 2012 03:59 PM
to calculate FCFF from EBITDA first we deduct D&A, then interest and then tax. the figure so arrived is called EAT. now, we add back non-cash expenses like D&A and also after-tax interest expense and then make adjustments for working capital changes and then deduct capex.

hope this is right... Binny Sir can you please explain the concept of FCFF in some more detail.

Thank You

Dec 25 2012 04:59 PM
hope this is right... Binny Sir can you please explain the concept of FCFF in some more detail.

Thank You

It really doesn't make sense to reduce D&A from EBITDA and then to add it back, because the net effect is 0. its like saying 2+2-2 = 2 why do that when you can just say 2=2.

Dec 25 2012 05:07 PM
hi suhas.

we need to consider tax also which is calculated on income after deducting D&A.so let tax be 50%

now let ebitda = 100

d&A = 20

ebit = 80

and interest = 0

ie ebt = 80

now tax@ 50%=40

eat = 40

now add D&A = 20

ie (40+20)= 60,which is not same as ebitda

hope this make sense. sorry if i am wrong.

Dec 25 2012 05:24 PM
we need to consider tax also which is calculated on income after deducting D&A.so let tax be 50%

now let ebitda = 100

d&A = 20

ebit = 80

and interest = 0

ie ebt = 80

now tax@ 50%=40

eat = 40

now add D&A = 20

ie (40+20)= 60,which is not same as ebitda

hope this make sense. sorry if i am wrong.

Hi Bhanu,

Yes, that does make sense.....i am probably going to go back to the video to make sure I understand this better. I am sure a lot of ppl are confused over this.

Thank you.

Dec 25 2012 05:35 PM
Yes, that does make sense.....i am probably going to go back to the video to make sure I understand this better. I am sure a lot of ppl are confused over this.

Thank you.

The option "D&A should be subtracted from EBITDA" basically indicates what is done in the video were we start with EBIT (hence D&A is already subtracted from EBITDA) to show the unlevered net income.

Fundamentally this is how you calculate Unlevered FCF (UFCF)

1. Start with Earnings before interest and taxes (EBIT) x (1-Tax Rate)

2. Add back any dep/amortization (non cash expenses)

3. Subtract any changes in NWC (CA-CL)

4. Subtract any capex

5. Arrive at FCF

Now you will notice that the tax amount is applicable to EBIT and not EBITDA. Thats why first we start with EBIT (without the DA), then apply the tax rate to the EBIT, then add back D&A to reflect UFCF.

Unlike what you said in your answer, you cant just start with EBITDA (just because you are adding D&A back). If you start with EBITDA then the effective tax amount (lets say 30% of EBITDA) is different from the correct tax amount (30% of EBIT). So we start with EBIT, then apply the tax rate on this amount, then add back D&A.

Is this explanation helpful?

Jan 03 2013 11:31 PM
Fundamentally this is how you calculate Unlevered FCF (UFCF)

1. Start with Earnings before interest and taxes (EBIT) x (1-Tax Rate)

2. Add back any dep/amortization (non cash expenses)

3. Subtract any changes in NWC (CA-CL)

4. Subtract any capex

5. Arrive at FCF

Now you will notice that the tax amount is applicable to EBIT and not EBITDA. Thats why first we start with EBIT (without the DA), then apply the tax rate to the EBIT, then add back D&A to reflect UFCF.

Unlike what you said in your answer, you cant just start with EBITDA (just because you are adding D&A back). If you start with EBITDA then the effective tax amount (lets say 30% of EBITDA) is different from the correct tax amount (30% of EBIT). So we start with EBIT, then apply the tax rate on this amount, then add back D&A.

Is this explanation helpful?