Net operating profit after tax
DCFEBIT taxed as if the company had no debt, the starting point for unlevered cash flow.
Also written: NOPAT, EBIAT
NOPAT is operating profit multiplied by one minus the tax rate. It answers what the business would earn after tax if it were financed entirely with equity.
The point of taxing EBIT rather than pre tax income is to keep financing out of the operating picture. Reported tax has already been reduced by the deduction on interest, so it embeds the capital structure; NOPAT deliberately does not.
It is the foundation of unlevered free cash flow and of return on invested capital, which is NOPAT divided by invested capital. Both are meant to describe the business rather than its funding, which is why both start here.
The tax rate to use is normally a normalised or marginal effective rate rather than whatever the company reported last year, since reported rates are distorted by one off items, jurisdictional mix and prior year adjustments.
Worked example
EBIT of 160 at a 25% tax rate gives NOPAT of 120.
Note this is not the reported tax charge. Reported tax would be struck after the 30 of interest, on 130 of pre tax profit, giving 32.5 rather than 40. The 7.5 difference is the tax shield, and WACC already accounts for it through the after tax cost of debt.