Hi guys,

Quick question, is this a typo from Schwezer notes? Shouldn’t it be cash interest paid be -500 in the calculation of FCFF? They have written it as positive in the formula below. Page 97 book 3.

Thanks in advance!

Hi guys,

Quick question, is this a typo from Schwezer notes? Shouldn’t it be cash interest paid be -500 in the calculation of FCFF? They have written it as positive in the formula below. Page 97 book 3.

Thanks in advance!

Free Cash Flow to the Firm represents the cash that is available to *all* providers of capital, including debt-holders and equity owners.

For FCFF, you add back the Cash Interest Paid (after tax shield adjustment) back to CFO because FCFF is supposed to be cash available *before* the company pays back its providers of capital.

In FCFE (Free Cash Flow to Equity), you will be taking that Interest Paid back out, as well as the Net Proceeds from Borrowing because FCFE is only the cash available to equity owners.

Hi AKRapoza,

But it is stated “cash interest paid (500)” this gets me very confused. Can you please explain why we ignore the minus sign here?

There are two things going on here.

First thing is the interest expense of $1,000. That is an income statement item, and it is a *use* of cash.

Second thing is the increase in interest payable. That is a balance sheet item, and it is a *source* of cash (any increase in payables is considered a source of cash because the expense was not paid, but has accrued instead).

So, adding both up, we have a net of $500 **paid** to interest.

This is a cash item that was already paid to debtholders, but FCFF is supposed to take that out so that it can account for cash available to both debtholders and equity holders.