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FCFF Formula

I am trying to understand below:

FCFF = NI + NCC + [Int * (1 - t)] + FCInv - WCInv

but come across one thing which I do not really understand. What does [Int * (1 - t)] mean in this context? I understand that it’s interest expense but why multiply it with the non-tax rates?

Thanks in advance for your help.

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The easiest way to see this, in my opinion, is to compare two companies that are essentially identical except for capital structure, so they will have the same FCFF:

Company 1:

  • Revenue = 1,000, all cash
  • Operating expenses = 700, all cash
  • Depreciation = 100
  • Interest expense = 0
  • Tax rate = 30%
  • FCInv = 50
  • WCInv = 0

Company 2:

  • Revenue = 1,000, all cash
  • Operating expenses = 700, all cash
  • Depreciation = 100
  • Interest expense = 20
  • Tax rate = 30%
  • FCInv = 50
  • WCInv = 0

Calculate FCFF for Company 1.  Then calculate FCFF for Company 2, knowing that it has to be the same value as for Company 1.  You should see pretty quickly why you add interest net of taxes.

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

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Short answer is that interest is tax-deductible.  So, the after-tax cost of interest is what matters, and that’s what gets added back. 

You keep using that word.  I do not think it means what you think it means.