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Hi there,
I found in 201406Q2, the answer mentioned “Interest is not normally included in the net present value calculations. Instead, it is normally imputed within the cost of capital or discount rate. In this case, it is included in the financing side effects”.
However, in 201606 Q1, when calculate the Dividend capacity through FCF method, the interest cost is deducted.
What’s the different btw this two method? Why the interest is considered in 201606 Q1 but ignored in 201406 Q2?
Many thanks
Sunny1987It is perfectly true that when discounting the FCF at the WACC we never subtract interest because it is accounting for in the WACC (just as is always the case when appraising project cash flows at the WACC).
(Although of course, when we are discounting FCFE at the cost of equity, then we do subtract the interest to get the free cash flow to equity).However, Q1 in June 2016 specifically asks you to estimate the dividend capacity, and dividends are obviously always after payment of interest (and this has nothing to do with any discounting).
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