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Free cash flow to firm

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › Free cash flow to firm

  • This topic has 3 replies, 3 voices, and was last updated 1 year ago by John Moffat.
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  • Author
    Posts
  • September 7, 2021 at 11:13 am #634713
    ranganaherath
    Member
    • Topics: 24
    • Replies: 128
    • ☆☆

    Hi sir,
    Could explain in what instance we subtract the interest paid when arriving at free cashflow

    As one my understanding,
    Free cashflow to firm we don’t subtract the interest to find the free cashflow to equity based on gearing ratio

    And even in the formula given in the OT notes they haven’t reduced interest however in the Kaplan study text they have reduced interest?

    Do we reduce interest to arrive at dividends capacity? What’s the difference between free cashflow to equity and dividends capacity?

    Thank you 🙂

    September 7, 2021 at 4:24 pm #634761
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 51538
    • ☆☆☆☆☆

    Free cash flow to the firm is the amount available to pay debt interest and dividends. So we do not subtract interest and discount at the WACC (which includes the cost of debt in the calculation) to get the value of the firm as a whole.

    Free cash flow to equity is after interest and is the amount available for dividends (the dividend capacity). This is discounted at the cost of equity to get the value of the equity.

    I do explain this in my free lectures.

    September 18, 2021 at 1:14 pm #635974
    ruchikapg
    Member
    • Topics: 1
    • Replies: 1
    • ☆

    Sir,

    When calculating free cash flows, if the company has a large capital allowance to be claimed which brings the tax payable to zero, do we need to deduct Tax ?

    September 18, 2021 at 4:10 pm #635983
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 51538
    • ☆☆☆☆☆

    If the tax is zero for any reason then there is nothing to subtract.

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