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Hi sir,
Could explain in what instance we subtract the interest paid when arriving at free cashflowAs one my understanding,
Free cashflow to firm we don’t subtract the interest to find the free cashflow to equity based on gearing ratioAnd 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 🙂
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.
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 ?
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