- FCFF = NI + INT (1- tax rate) + NCC - FCInv - WCInv
- FCFF = EBIT (1- tax rate) + DEP - FCInv - WCInv
- FCFF = EBITDA (1- tax rate) + DEP (tax rate) - FCInv - WCInv
I can mathematically get from 1 to 2 to 3.
However, can someone please help explain how interest and depreciation are treated differently here? I am struggling to wrap my head around it. Where depreciation is included (1 & 2), the depreciation is added back as a NCC – makes sense. The tax shield is retained. However, isn’t the goal to do the same for interest: retain the tax shield but add the interest back as it is available to the firm and should be included in FCFF? I know this is wrong but my intuition tells me the interest expense should be added back without (t- tax rate).
Also, isn’t there an interest tax shield not included in #3?
Anyone able to explain in layman’s terms?