FCFF Calculation

vallabhu · February 25, 2015, 5:04pm

Hi All,

I Understand the reason for adding back Interest expense while calculating FCFF but bit confused with tax rate, why are we reducing the interest expense proportionate to tax rate?

S2000magician · February 25, 2015, 5:29pm

Because interest is tax deductible, so the change in cash flow is the interest cost net of taxes.

vallabhu · February 25, 2015, 6:59pm

Thank you!!

S2000magician · February 25, 2015, 11:14pm

You’re welcome.

The same question came up in another thread; I posted a longer explanation there: http://www.analystforum.com/forums/cfa-forums/cfa-level-ii-forum/91339055