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I was solving a question in the Kaplan Revision kit where free cash flows formula was modified as; EBIT (1-T). In most texts, the free cash flows formula is usually given as EBIT. i would like to know why (1-T) was added to the formula, and what it stands for. Thank you.
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(1-T) means after tax.
It will make EBIT into earnings after tax. So, for example, EBIT is 40,000 and tax rate is 40%, By multiplying 40000 with (1-0.4) you will get 24,000. which is earning after tax.
The original formula of free cash flow does contain (1-T) but where tax rate is not given in the question then there is no need to use it.
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