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July 24, 2020 at 8:54 pm
Hi John, not sure if this is the correct place to ask this. If we have a cash flow which increases in perpetuity like in the above example, how would we account for tax on this cash flow? Would it be the same as years 1 to 3 by simply taking the cash flow and deducting tax? Thanks in advance.
John Moffat says
July 25, 2020 at 9:58 am
It depends on the timing of the tax. If tax is payable without any delay then yes – you would take use the cash flow less tax. However if (as is more likely) there is a one year delay in the tax, then you need to calculate the PV of the cash flow before tax, then get the PV of the tax flows by multiplying the PV of the before-tax cash flows by the tax rate and discounting this figure for one year.
(It is OK asking here except that I don’t always see comments here. So better is to ask in the Ask the Tutor Forum – I always see questions posted there and so always answer 🙂 )
July 25, 2020 at 11:10 am
Hi John, thanks very much for the speedy reply. This has made it a lot clearer for me.
July 25, 2020 at 5:45 pm
You are welcome 🙂
April 20, 2020 at 8:08 am
Sir in eg 2 the free cash flow of $228is the total value of the firm right and not the market value of the equity.
July 25, 2020 at 5:48 pm
No – that is just the cash flow for the year.
The PV of the free cash flows will be the value of the firm (equity + debt) 🙂
March 15, 2020 at 4:39 pm
What is the reason for not deducting interest in Example 2. Earning are given before interest and tax, so we have to deduct tax and add back depreciation. Please explain
March 16, 2020 at 7:09 am
The after-tax interest is accounted for in the calculate of the WACC.
Just as when appraising projects we never include interest in the cash flows for the same reason.
salvia cardoso says
August 13, 2019 at 8:56 am
Hi John, why isn’t loans repaid deducted?
August 13, 2019 at 11:05 am
It is when calculating the free cash flow to equity, but not when calculating the free cash flow to the firm.
May 7, 2019 at 12:53 pm
Hello. Please tell about the example 2: why don’t we subtract the interest paid to get the free cash flow?
May 7, 2019 at 2:10 pm
Free cash flow is before interest (just as we ignore interest in Paper FM (was F9) when appraising projects. We discount at the WACC (which takes account of the cost of debt) to get the value of the business.
The free cash flow to equity is after interest, and is discounted at the cost of equity to get the value of equity.
I do explain all of this in the free lectures.
October 6, 2018 at 5:22 am
hi john why don’t we discount for four years because the qstn is saying from 4 yrs to infinity
October 6, 2018 at 11:46 am
Multiplying by 1/r give the PV at time 0 of a perpetuity starting at time 1.
Since the prepetuity starts 3 years late (at time 4 instead of time 1) multiplying by 1/r gives a PV 3 years late – at time 3 instead of time 0. So we need to discount for 3 years.
August 28, 2018 at 12:35 pm
Hi John, the values are not given for example 2; free cash flows; in the lecture notes. can you please reply back with the question.
August 28, 2018 at 7:23 pm
Download the notes again – they were re-uploaded a few weeks ago.
August 29, 2018 at 11:03 am
July 13, 2018 at 8:44 am
For the FCF formula, Is the amount needed to replace non-current asset considered as capital expenditure? If yes, does that mean we separate total capex investment into 2 part, one is to replace current depreciated fixed asset (of which equal to depreciation), and the other part is to invest additional fixed asset?
July 13, 2018 at 2:56 pm
Correct (although you don’t really need to show the split – just don’t add back the depreciation, but do subtract any additional investment).
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