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tax adjustment

why interest(1-t) is added and not only Interest…. to Net income to calculate FCFF.

I understand the topic of tax shield.

My question is ……just as whole depreciation is added back as their is no actual cash outflow,

why isnt whole interest added back (as interest is available to both debt & equity owners) to calculate FCFF.

Later on the interest will be distributed to debtholders.

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tej2019 wrote:
why interest(1-t) is added and not only Interest…. to Net income to calculate FCFF.

I understand the topic of tax shield.

My question is ……just as whole depreciation is added back as their is no actual cash outflow,

why isnt whole interest added back (as interest is available to both debt & equity owners) to calculate FCFF.

Later on the interest will be distributed to debtholders.

As you say: depreciation is added back because there is no cash flow.

That’s not the reason that interest is added back, because there is cash flow with interest.

Paying interest is a use of FCFF.  If the firm chooses to use the cash to pay interest, it gets a tax break.  If the firm chooses to use the cash for something else, it might not get the tax break.  The idea of calculating FCFF is to arrive at the amount of cash available before that decision is made; before that decision is made the firm hasn’t paid interest (so add back 100% of interest), and the firm hasn’t received the tax break from paying interest (so subtract the tax saving).

Simplify the complicated side; don't complify the simplicated side.

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thanks s2000 magician….

You’re welcome.

Simplify the complicated side; don't complify the simplicated side.

Financial Exam Help 123: The place to get help for the CFA® exams
http://financialexamhelp123.com/