To convert net income to unlevered FCF, which equation is used?

The chosen answer is correct because converting net income to unlevered free cash flow (FCF) requires a comprehensive understanding of the relationship between these financial metrics.

To derive unlevered FCF from net income, it is essential to first adjust net income for interest and taxes to determine net operating profit after tax (NOPAT). NOPAT gives a clearer picture of the company's operating performance without the influence of capital structure. The equation presented captures these necessary components: starting with net income and adding back interest and taxes allows for a raw operating profitability measure, unaffected by how a company is financed.

Furthermore, the equation continues by modifying NOPAT with depreciation and amortization, which are non-cash expenses that reduce net income but do not affect actual cash flow. Finally, subtracting capital expenditures (CapEx) and changes in net working capital (NWC) further refines the calculation to arrive at unlevered FCF, which reflects the cash generated by the company's operations that is available to all capital providers, not just those who have lent money.

In contrast, the other options don't accurately cover the necessary steps for conversion or involve irrelevant elements that do not fit the structure necessary for calculating unlevered FCF.