I can plug the numbers into the formula pretty easily, but I really want to be able to conceptually understand this and I think I’m missing the point.

Lets take FCFF to mean all available (free) funds to bondholders and shareholders…

Now lets assume a pretty simple example

EBITDA —> $150

Depreication —> $50

EBIT —> $100

Interest Expense —> $10

EBT —> $90

Tax Rate —> 30% (27)

**Net Income = 63**

Let’s further assume we have no FCinv or WCinv… therefore

FCFF = 63 (*NI*) + 50 (*Dep*) + 10*(1-.3) (*Interest Net of Tax*) = $120.

So, I guess the part that confuses me is why are we adding back just the $7? It’s as if the more interest we have, the higher tax savings we obtain (which I assumed was a plus for FCFF)…

It almost seems as though it should be Interest Expense(1+T). Why does our tax shield from having interest expense on our income statement reduce our FCFF?

Can someone really just dumb it down for me – simply stating that it’s net of tax doesn’t really do it for me. Thanks