What is the equation for unlevered free cash flow (FCF)?

Unlevered free cash flow (FCF) represents the cash generated by a company's operations that is available to all providers of capital, including debt and equity holders, without the impact of capital structure. The correct formula for calculating unlevered free cash flow is:

[ \text{FCF} = EBIT \times (1 - TR) + D - \text{Change In NWC} - \text{CapEx} ]

In the correct answer, EBIT (Earnings Before Interest and Taxes) is adjusted for the tax rate (TR) which reflects the cash available after taxes but before interest payments. Depreciation (D) is added back because it is a non-cash expense; this adjustment signifies the actual cash flow available. The changes in net working capital (Change In NWC) are subtracted since they represent cash that is tied up in the company's ongoing operations and not available to investors. Finally, capital expenditures (CapEx) are deducted, as they represent cash outflows needed for investments in property, plant, and equipment, further reducing the cash available for free cash flow.

This formula provides a complete picture of the cash that is truly available to equity and debt holders, isolating the effects of financial leverage and