Ch10 Example 6 – Free cash flows

I’ve found a pdf on the CIMA website – Company valuations and free cash flow for students of F3.pdf

which explains how to deduct tax in each case

When calculating Free cash flow to all investors you
Deduct Tax (excluding tax relief on interest) (PBIT x tax rate)

which is what you have in the solution (apologies for questioning this previously)

When calculating Free cash flow to equity you
Deduct Tax for the year (PBIT – interest) x tax rate

I think maybe the tax saving on interest should be added after the Free cash flow to all investors line, in a sense that you can’t have a tax saving on interest until you’ve deducted the interest. I’ve put the two calculations below so it’s clear. I think it must be in there somewhere because of the different way each free cash flow calculation deals with the tax deduction. Does this make sense?

$000s
Profit before interest and tax (operating profit) 935
Less: Tax (20% x (935-170)) (153)
Add: Depreciation (non-cash) 120
Less: Investment in non-current assets (420)
Less: Investment in working capital (185)
Less: Interest (170)
——–
FREE CASH FLOW TO EQUITY 127
——–

$000s
Profit before interest and tax (operating profit) 935
Less: Tax (20% x 935) (187)
Add: Depreciation (non-cash) 120
Less: Investment in non-current assets (420)
Less: Investment in working capital (185)
——–
FREE CASH FLOW TO ALL INVESTORS 263
Less: Interest (170)
Add: tax saving on interest (20% x 170) 34
——–
FREE CASH FLOW TO EQUITY 127
——–

I’m starting to doubt my understanding again. This looks like the free cash flow to debt holders is interest less tax on that interest (at the business rate of tax) which seems odd. If you don’t put the 34 there where else would you put it?