Lost with CFO and FCFF :( Help!

Hello everyone,

I need to do a modelling at work and I don’t remember anymore these cash flow concepts.

As background, two things:

  • I want to use IFRS and include interest expense in CFF, not in CFO
  • the company I’m modelling has a negative net income for the first couple of years, so no taxes are paid.

My objective: project the company’s income statement, BS and full CF statement, but also calculate FCFF and FCFE to do its valuation.

So CFO = EBITDA - Change in NWK - Taxes

Now FCFF: the formula is FCFF = CFO + Interest expense (1-t)

Considering my CFO above, for me this should be FCFF = CFO - Interest expense * t as I don’t have any interest expense included in my CFO. So two questions:

  • is this correct? i.e., should I still remove the interest shield from CFO to arrive at my CFF?
  • in the first years when the company doesn’t pay any taxes, I suppose the Interest expense * t should be zero, right?

Thanks a lot for your help!!!


  1. If you start EBIT you do not need to correct for the interest tax-shield (independently of whether the company is paying taxes or not). However, if you start from net income you need to correct for the interest tax-shield [(1-t) * i], 2. In your FCFF formula above CAPEX is missing to arrive from CFO to FCFF, 3. If taxes are zero, there is ni tax-shield and hence there is no tax savings on interest payments. As such, if you start from net income you add-back the full interest amount. Again, if you start from EBIT oder EBITDA no consideration of interest is needed to arrive to FCFF, 4. To arrive from FCFF to FCFE you than add back the interest tax-shield, or in absence of taxes the full interest amount.

Cheers, Oscar

Yes. This is correct.

CFO is calculated from Net Income. Net Income is calculated after deducting Interest Expense. Hence to get FCFF you need to add Interest Expense.