In the free cash flow formula shown, which items are subtracted from EBITDA to compute free cash flow?

• A. CapEx, Interest Expense, Taxes, Dividends, and Change in Working Capital
• B. Depreciation, Amortization, and Taxes
• C. Only CapEx and Taxes
• D. None of the above

Answer: (A)

The main idea is to convert EBITDA, a cash-pretending figure, into cash actually available after all cash uses. EBITDA excludes financing and tax and non-cash charges, so to see how much cash the business truly has, you subtract the items that consume cash: CapEx represents ongoing investments in the business, taxes are cash taxes paid, interest expense is cash paid for debt service, changes in working capital capture net cash tied up or released in day-to-day operations, and dividends are cash paid out to shareholders. All of these reduce the cash left after operating activities, so they’re subtracted from EBITDA to compute free cash flow. Depreciation and amortization are non-cash and already excluded in EBITDA, so they aren’t subtracted. Subtracting only CapEx and Taxes would miss other cash drains, and “none of the above” isn’t accurate given these cash outflows.