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I see some questions use free cash flow for NPV calculation while some use free cash flow to equity. Can you tell me which should we use and why?
Also in Q1 of 2013 Dec EXAM, the answer uses post tax profit and add back full depreciation. Shouldn’t we add back depreciation net of tax because it is post tax profit?
I’m also confused about interest. Is it true that we should ignore all interest in FCF and deduct them from FCFE?
Thank you.
Also about Q1 2013 Dec. I understand that the disposal machine of 500 should be accounted as last year cash inflow, but the company dosen’t sell the land and building, why 80%*MP1250m is also included in last year cash inflow?
The question will almost always tell you.
Using the free cash flow to the business will give you the total value of the business (equity + debt).
Using free cash flow to equity will give you the value of the equity.
In the Q1 you refer to, depreciation is subtracted to arrive at the taxable profit, so that the tax can be calculated. The whole of the depreciation is then added back because it is not a cash flow. (The exception is when the question says that an amount equal to the depreciation is needed to maintain operations – in that case we do not need to add it back)
Yes – when calculating free cash flow (as with all normal project appraisals) we always ignore interest because we discount at the WACC which incorporates the cost of debt.
When using free cash flow to equity, we do subtract interest because we are looking at what is available for equity, and we discount it at the cost of equity,
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