How Do You Get From Revenue to Free Cash Flow?

Begin with revenue. Subtract COGS to get gross profit, then subtract operating expenses (SG&A, R&D, and D&A) to reach EBIT (operating income). Apply the tax rate to EBIT — note you tax EBIT, not EBT, because unlevered FCF deliberately ignores interest and its tax shield. EBIT × (1 - tax) = NOPAT. From NOPAT, add back D&A (non-cash, so it was deducted but no cash left), subtract CapEx (a cash outflow not run through the income statement), and subtract the increase in net working capital (cash absorbed by growing receivables and inventory, offset by payables). The result is unlevered free cash flow.

For a DCF that values the entire enterprise, you discount unlevered free cash flow at WACC. 'Unlevered' means capital-structure-neutral — the cash flow should be the same regardless of how the company is financed. So you tax EBIT directly (before interest), which strips out the tax shield of debt. The tax benefit of debt is captured separately in the WACC (via the after-tax cost of debt), so building it into the cash flow too would double-count it. This is the single most-tested nuance in this question.

Two adjustments trip people up. (1) Increase in net working capital is SUBTRACTED — when receivables and inventory grow faster than payables, cash is tied up in operations and isn't available to investors. A decrease in working capital would ADD cash. (2) CapEx is subtracted even though it never appears on the income statement; it's the cash the business must reinvest to maintain and grow its asset base. D&A is added back precisely because it's the non-cash accounting allocation of past CapEx — the two are related but distinct (D&A is non-cash and on the income statement; CapEx is cash and on the cash flow statement).

Unlevered FCF (above) is before financing and is discounted at WACC to value the whole enterprise. Levered FCF (free cash flow to equity) is AFTER interest and mandatory debt repayment, and is discounted at the cost of equity to value just the equity. To go from unlevered to levered: subtract after-tax interest expense and mandatory debt paydown (and add net new borrowing). In banking DCFs you almost always use unlevered FCF; knowing both, and which discount rate pairs with which, is the mark of a strong answer.