Adding back interest tax shield to get FCFF
If you take a look at the formula for computing FCFF from EBITDA,
FCFF = EBITDA (1-tax rate) + Depreciation (tax rate) - FCInv - WCInv
you would notice we add back the depreciation tax shield because that tax saving represents cash available to the company’s investors.
Why then, don’t we also add back the interest tax shield in this formula?
Study together. Pass together.
Join the world's largest online community of CFA, CAIA and FRM candidates.