Calculating FCFF from EBIT - Interest Tax Shield
In the notes, the formula for arriving FCFF from EBIT is as followings:
FCFF = [EBIT X (1 - Tax Rate)] + Dep - FCInv - WCInv
- FCFF = Free cashflow to the firm
- EBIT = Earnings before interests and taxes
- Dep = Depreciation
- FCInv = Capital investments
- WCInv = Working capital investments
The point I do not get from this formula is that why is not the tax shield from paying interest being added back. It is a real benefit to the firm.
Study together. Pass together.
Join the world's largest online community of CFA, CAIA and FRM candidates.