FCFF calculation

[majorkonig]

just want to ask a question about FCFF
if the ebit is positive, for example $100, while the EBTis negative, for example $-20
if i start from EBIT to calculate the FCFF, do i still use EBITx (1-Tax) even though EBT is negative and no tax is needed to be paid in the income statement??

 

[MrSmart]

Yes. FCFF requires the net operating profit after subtractiing operating cash tax.
The whole point is measuring your operating performance delevered.

 

[majorkonig]

thanks for your reply
but
FCFF = EBIT x (1-tax) + depreciation - capex - change in working capital
and
FCFF = net income + interest x (1-tax) + depreciation - capex - change in working capital
so EBIT x (1-tax) = net income + interest x (1-tax)
if in the income statement
EBIT = 100, interest= -120, EBT = -20, net income = - 20, tax = 30% (no tax because EBT is negative and EBT=net income)
then EBIT x (1-tax) = 100x (1-30%) = 70
then net income + interest x (1-tax) = -20 + 120 x (1-30%) = 64
and 70 not equal to 64
can anyone further explain??

 

[majorkonig]

my idea is that if you look at the case of
EBIT = 100, interest= -120, EBT = -20n net income = -20
if FCFF mean the free cash flow available to debt and equity holder, then FCFF in this case should be 100
because tax is 0 in this case and that whole 100 is attributable to the debt and equity holder
is my idea correct???

 

[MrSmart]

majorkonig wrote:
thanks for your reply
but
FCFF = EBIT x (1-tax) + depreciation - capex - change in working capital
and
FCFF = net income + interest x (1-tax) + depreciation - capex - change in working capital
so EBIT x (1-tax) = net income + interest x (1-tax)
if in the income statement
EBIT = 100, interest= -120, EBT = -20, net income = - 20, tax = 30% (no tax because EBT is negative and EBT=net income)
then EBIT x (1-tax) = 100x (1-30%) = 70
then net income + interest x (1-tax) = -20 + 120 x (1-30%) = 64
and 70 not equal to 64
can anyone further explain??

You did not apply a tax carry-forward loss. EBT is -20, and NI is -20*.7= -14.
100*0.7 = -14 + 120(0.7) = $70
In real terms, you’d have to adjust for deferred taxes (if it’s material enough to demand the effort), but we are assuming DTLs and DTAs offset at some point.