Why does FCF calculation ignore interest?
Haven't looked at finance in a while, so apologies if I sound dumb, but when calculating FCF using EBIT, you multiply EBIT by (1-Tax). My question is, by doing this, aren't you ignoring the fact that interest is tax deductible?
Interest is only excluded from the equation when calculating FCF to the firm (FCFF), since FCFF is attributed to both debt and equity holders. When calculating FCF to equity (FCFE), you start with Net Income where interest payments are taken into account.
When performing a DCF using FCFF, the WACC will implicitly account for the tax-deductible nature of debt because you are taking the after-tax cost of debt and not the cost of debt itself.
Nihil ut laborum optio nam. Eos aut occaecati et sunt harum. Ea quisquam culpa fugit ea. Voluptas dolores ad placeat optio mollitia. Assumenda voluptatem officiis quos quo delectus qui rerum.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...