Is there an interest tax shield on unlevered free cash flows and why? What about depreciation tax shield?

Published On - March 2, 2023

Josh Corporate Banking / Commercial Banking / Private Debt, Corporate Development, Financial Modeling, FP&A, Investment Banking, Private Equity

No, unlevered free cash flows (UFCF) do not account for interest income or interest expense. Unlevered free cash flows are before the effects of debt. Therefore, there is no tax shield from interest.

However, there is a tax shield from depreciation, since unlevered free cash flow does include depreciation expense before calculating taxes.

The formula for UFCF is: EBIT x (1-tax) + D&A – capex – increase in net working capital