# INT(1 - tax%)

hello everyone

If we want to calculate the available cash for lenders why we treat the interest expense as it taxable, if i paid \$1000 as an interest expense it’s not taxed and the full amount paid to the lenders, so why I calculate it after tax if i want to calculate the  cash available for the lenders

Begin your Level II studies with a FREE Schweser JumpStart Package. Available to December 2019 Level I CFA candidates only. Offer expires 1/29.

Because when we deducted it in calculating net income we had lower taxable income so we saved money on taxes.

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/

As if there weren’t any borrowing, we would have saved on the interest - hence we add.

Though, if we had higher income - we would have paid higher tax as well.

Thus, when we add interest, we also have to deduct additional tax.

Alternatively, we just add the net !

Considering you have not given the entire FCFF formula, I am just focusing on the part you mentioned.

Basically, the way I understand, the part of the formula which you have given involves reverse calculation of NOPAT.

The term NI + [Interest x(1- t)] gives us NOPAT which can also be calculated as EBITx(1 - t)

Consider this example,

Earnings before Interest and Taxes (EBIT)  \$1,000

Less: Interest                                                \$ 400

Earnings Before Taxes                                  \$ 600

Less; Tax @ 30%                                          \$180

Earnings After Tax(NI)                                   \$420

Method 1: I can find NOPAT by EBIT x (1-t) = \$1,000x(1 - 0.3) = \$700…..[EBIT is the profit of all funding parties of the company]

or

Method 2: I can find NOPAT by NI + [Int x(1-t)] = \$420 + [\$400 x (1-0.3)] = \$420 + [\$280] = \$700