Hi !
According to the theory, FCFF is the cash flow for both equity and bet holders and FCFF and FCFE are related to each other as follows:
FCFE = FCFF – Int(1 – Tax rate) + Net borrowing.
However, why interests aren't considered in a gross base for FCFF, as creditors receive intests in full?
I mean, FCFF, which is broader than FCFE (as it computes flows owned by creditors too), shouldnt be FCFF = FCFE+ int + net borrowing ?
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FCFF = EBIT (1-Tax rate) + D&A - Capex +/- Change in Working Capital
FCFE = Net Income + D&A - Capex +/- Change in Working Capital +/- Change in Debt
I guess it is this
I guess the reason interest is not included in FCFF is it is part of financing and accounting decision so the same reasoning is applied which you apply to EBITDA
Google the concept of tax shield (i.e., tax-deductibility of interest expenses)
FCFF is theoretically the cash available to the firm to use at their discretion (including paying for debt and equity holders) and should provide a like-for-like comparison among firms. So the tax shielded interest gets included. However, there isn't much discretion on how much they pay in taxes, so that has to be removed.
Hi guys.
Tks for the replies.
I do understand the concept of tax shield.
Maybe the doubt lies on "to whom" is this FCFF cash available.
I am considering FCFF is the firm´s money available to all equity + credit holders;
(a) The interests tax shield (i.e. the firm´s corporate tax NOT paid because of of interests expenses, " tax * i ") only ADDs money available to the equity holders.
Correct me if I am wrong : bond/credit holders are entitled to 100% of the interests, right?
(b) But Even if you consider that credit holders will eventually have to pay taxes on such interest revenue ( "tax * i" ) and thereby should compute only the net value gained ( " (1-t)* i " ) , that would only make Taxes neutral to the total money available to both equity + debt holders of the Firm.
i.e Equity holders "gain" t*i tax shield per point ("a") above and bond holders pay t*i taxes per point ("b").
What am I losing here?
Can someone try to make the concept more clear, please ?
PS: mixing computation of FCFE an FCFF starting by NI or NOPAT only makes things more complicated when trying to compare, because there are many lines between both (interests mainly).
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