How to deal with deferred taxes and minority interest in calculation of unlevered free cash flow?
1. Deferred taxes is a non-cash item that has to be adjusted like it is another working capital item (e.g inventory, AP, AR). If it goes up, then it is taxes you didn’t pay and cash goes up. If it goes down, then visa versa. 2. This is only for equity accounted entities. Cost accounted profits are only recognized when cash is received. Equity accounted is based on a net pro-rata basis. Net income therefore has to be reduced by the undistributed equity-accounted earnings (e.g. $20 in equity income means your FCF are $20 lower than the income statement). 3. Minority interests. This is money owned by a consolidated, but not 100% owned subsidiary. It is non-cash. Since this is a “negative” balance, the FCF is higher than net income because you still have the cash and haven’t really distributed it to minority holders. B. Net Interest Expense includes a tax benefit. For example, let’s say that taxes are 30%. You have a $100 bond outstanding that you pay 10%, simple interest ($10/year). This
