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Dear Sirs,
Would like to know in chapter 16 example 2, why we don’t need to deduct 12 interest paid from EBIT? (answer in page 150)
Thanks,
Candy
For the same reason that we do not subtract interest when getting the cash flows for a project. Discounting at the WACC takes account of the interest because the cost of debt is included in the calculation of the WACC.
It is only with free cash flows to equity (which we discount at the cost of equity) where we subtract the interest.
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