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1. in the answer sheet, it says the interest is ignored as its impact is included in the companies discount rates
i know that interest must be deducted after operating profit but why do we say that “interest is ignored since its impact is included in the companies’ discount rate” ?
i do not understand this part….
We always ignore interest when calculating free cash flows (just as we ignore it in Paper F9 when calculating the cash flows for any project).
It is because we then discount at the WACC, and the calculation of the WACC includes the interest cost of debt. If we were to include interest in the cash flows as well then we would be accounting for it twice 🙂
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