The investment banking interview question we’re going to go over today is “How does $10 increase in D&A affect UFCF?” UFCF stands for Unlevered Free Cash Flow. Here’s what you should say.
“If D&A increases by $10, then EBIT will decrease by ten. Assuming a 20% tax rate, NOPAT decreases by eight. Then we need to add back the extra $10 of D&A because it’s a non-cash item. So Unlevered Free Cash Flow increases by two.”
And there you have it. That’s how you can deliver this answer to this question: “How does $10 increase in D&A affect UFCF”. Conceptually UFCF increases by $2 because the higher D&A expense results in higher tax savings. That $2 of higher UFCF comes from the lower tax expense.