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Free cash flow

This topic has 1 reply, 2 voices, and was last updated 4 years ago by John Moffat.

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June 6, 2020 at 7:09 pm #573002
yellow
Participant
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Dear Moffat,
Thank you for your lectures.
I am a little confused about FCFF.
I accept the fact that the value of the firm is the PV of free cash flow discounted at WACC. but my question is why we use cash flow BEFORE interest and tax? Why not use cash flow after tax and interest? Both tax and interest are cash outflow! In this case there is no difference between a highly geared and ungeared company! why?! Is there any concept behind that? Does it relate to M&M theory!!?? Sorry, I am really confused …
Thank you
June 7, 2020 at 10:13 am #573027
John Moffat
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It is the same reason that we ignore interest in the normal calculation of NPV of a project.
The calculation of the WACC takes into account the interest on debt (and the tax saving on the interest) and so to include it in the cash flows as well would be double counting.
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