Unlevered free cash flow

Unlevered free cash flow is the cash the business itself throws off, before a single euro goes to lenders. It is the numerator of a standard enterprise DCF, which is why it must exclude interest entirely.

The build starts at EBIT, applies tax to get net operating profit after tax, adds back depreciation and amortisation because they are non cash, subtracts capital expenditure because it is a real cash cost that never touches the income statement, and subtracts the increase in working capital.

Taxing EBIT rather than using the reported tax charge is the step candidates miss. Reported tax is calculated after interest and therefore already includes the tax shield, and since WACC accounts for that shield through the after tax cost of debt, using reported tax would count it twice.

Discounting this at WACC gives enterprise value directly. To reach equity value you then subtract net debt, which is the same bridge used everywhere else.