How do you get from revenue to unlevered free cash flow?

Unlevered free cash flow is the cash the business produces for all its investors, before any interest. I'll use numbers in millions and assume a 25% tax rate. You start with revenue and take off the operating costs to get to EBIT. Say revenue is $1,000. Cost of goods sold and operating expenses, leaving out depreciation and amortization, come to $740, so EBITDA is $260. Subtract D&A of $60 and EBIT is $200. Then you take out taxes. I apply the tax rate to EBIT, not to pre-tax income, so taxes are $50 and after-tax operating profit is $150. Then three adjustments turn profit into cash. I add back the $60 of D&A, which gets me to $210. I subtract capital expenditures of $80, which leaves $130. And I subtract the increase in net working capital, say $30. That leaves unlevered free cash flow of $100. That's the number I'd discount in a DCF.

Unlevered free cash flow is the cash the business produces for all its investors, before any interest. I'll use numbers in millions and assume a 25% tax rate. You start with revenue and take off the operating costs to get to EBIT. Say revenue is $1,000. Cost of goods sold and operating expenses, leaving out depreciation and amortization, come to $740, so EBITDA is $260. Subtract D&A of $60 and EBIT is $200. Then you take out taxes. I apply the tax rate to EBIT, not to pre-tax income, so taxes are $50 and after-tax operating profit is $150. I skip interest on purpose. The cash flow has to look the same however the company is financed, and the tax saving from debt is already in WACC through the after-tax cost of debt. Counting it here too would double count it. Then three adjustments turn profit into cash. I add back the $60 of D&A, which gets me to $210. It reduced taxable profit, but no cash left the company. I subtract capital expenditures of $80, which leaves $130. That's real cash that never hit the income statement. And I subtract the increase in net working capital, say $30. Growing receivables and inventory ties up cash, and if working capital fell I'd add the change back. That leaves unlevered free cash flow of $100. That's the number I'd discount in a DCF. As a check, that's 10% of revenue against an EBITDA margin of 26%, and the whole gap is tax, capex and working capital. One convention to flag is stock-based compensation. Many models add it back as non-cash. I'd rather leave it in as a cost because it dilutes shareholders, and I'd say which I'm doing.