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In this example, why don’t we deduct interest paid from EBIT in calculation of free cash flows?
Thanks in advance
We never deduct interest from free cash flows.
We are calculating the free cash flows to the company and then discount at the WACC. The WACC includes the cost of debt, and therefore discounting at the WACC is accounting the the interest. (Exactly as in Paper F9 where we never include interest in the calculation of the net cash flow from a project).
Interest is only subtracted when calculation the free cash flow to equity (which is then discounted at the cost of equity).
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