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I have a question about problem 1 Section A : Chikepe (AFM exam in March/June 2018). In the calculation of market value of equity of Fishoro Co, FCFF of the most recent year is calculated as: PBIT+ non-cash expenses- additional cash investment – tax. About tax in calculation of FCFF, it’s a cash outflow from the firm, but it’s calculated as: tax rate* PBIT but is not calculated as: tax rate* PBT( profit before tax). I want to ask why?
With free cash flow to the firm we take the cash available for all investors (equity and debt) and so use the profit before interest and tax) and discount at the WACC. (The interest saved on the debt interest is take account of in the calculation of the WACC.)
Have you not watched my free lectures on this? 🙂
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