Tax effects on valuation
While interest expense is excluded from our FCFs, it's tax shield (which is very real) is taken into account in our WACC calculation.
But what about the tax effects of items like interest income and other non-operating items?
These items also present a very real tax effect (albeit negative since they increase the amount of taxes paid) but they are neither incorporated direclty into the cash flows OR into the WACC?
non-operating items are above the EBIT line, and thus get tax-affected in your FCF calculation.
interest income, technically there are more than 2 components to wacc, cash being one of the additional elements, and thus you can give it its own cost and adjust your wacc accordingly.
cheers.
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