Which expression defines FCFF?

• A. EBIT*(1-T) + Depreciation - Capex - ΔNWC
• B. Net income - Net capex - ΔNWC + Net borrowings
• C. EBITDA - Taxes - Interest
• D. Revenue - Costs - Taxes

Answer: (A)

Free Cash Flow to the Firm represents the cash a business generates that is available to all providers of capital, both debt and equity. The expression that captures this starts with after-tax operating earnings, adds back non-cash charges, and then subtracts the cash outlays needed to sustain and grow the business: EBIT times (1 minus the tax rate) plus depreciation, minus capital expenditures, minus the change in net working capital.

Here's why this makes sense: EBIT*(1-T) gives the cash produced by operations after taxes, without considering financing costs like interest. Depreciation is added back because it’s a non-cash expense, so it reduces reported income but doesn’t consume cash. Capex represents cash outflows for replacing or expanding fixed assets, so it must be subtracted. ΔNWC reflects changes in working capital; increases in working capital tie up cash, so they reduce FCFF, while decreases release cash and would increase FCFF.

Other formulas don’t fit FCFF because they mix in financing elements (like net borrowings or interest) or omit necessary cash outlays (like capital expenditures and working capital changes).