Hi, Can someone confirm we are supposed to SUBTRACT bond amorization premium from NI to arrive at FCFF as well as FCFE? I see in my test prep provider they have it marked as adding bond amortization to arrive at FCFE and I’m pretty sure that’s inaccurate, just want to confirm.
The amortization of a premium on a bond you’ve issued decreases your interest expense. Therefore, to get from interest expense (on the income statement) to the cash interest paid, you have to subtract the amount of the amortization.
The amortization of a discount on a bond you’ve issued increases your interest expense. Therefore, to get from interest expense (on the income statement) to the cash interest paid, you have to add the amount of the amortization.
I’ll leave it to you to work out what you do with the amortization of premia and discounts on bonds that you’ve purchased.