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Hi John,
Appendix 3: cash flow calculation for year 1-4, PBIT are 2713,2849, 2991 and 3141. examiner used these figures to calculate the tax. However the interest is tax allowable, why did he deduct £720m first from the above figure before calculating the tax? Thank you.
The answer has calculated the value of the firm by discounting the free cash flows at the WACC.
We never subtract the interest (or deal with the tax saving on the interest) in arriving at the free cash flows – discounting at the WACC takes account of it (because the after-tax cost of debt is part of the calculation of the WACC).
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