Why is that while calculating FCFF using EBITDA and EBIT i nterest tax shield gained _ isn’t _ added back? If it has to do with the beginning point of calculation, why is it that while calculating FCFF using EBITDA t ax shield gained by depreciation is added back?
FCFF = NI(1-t) + Int(1-t) + NCC - FCInv - WCINv
Where NI = Net Income
t = Tax rate
Int = Interest
NCC = Non cash charges
FCInv = Fixed capital investment
WCInv = Working capital investment
If we assume that NCC = Depreciation
FCFF = NI(1-t) + Int(1-t) + DEP - FCInv - WCINv
NI = (EBITDA -DEP-INT)(1-t)
FCFF = (EBITDA - DEP-INT)(1-t) + Int(1-t) + DEP - FCInv - WCINv
=EBITDA(1-t) - DEP(1-t) - INT(1-t) + Int(1-t) + DEP - FCInv - WCINv
FCFF = EBITDA(1-t) - DEP(t) - FCInv - WCINv
Oh god, thank you! After spending countless hours pondering over the subject I feel stupid in realizing that simple math was the answer behind it. Thanks again!
My pleasure and good luck.
P.S. I felt the same before trying the algebra, so, we’re in the same boat.