Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › Tax shield from interest expense
- This topic has 4 replies, 2 voices, and was last updated 8 months ago by
John Moffat.
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- December 16, 2023 at 4:39 am #696860
Hi John.
A very good morning to you.
I’m taking financial modeling courses after ACCA and ran into error when modeling for free cash flow using net income method. In the model, interest expenses was added(perhaps to unlever the flow) and tax shield deducted. Tax shield is actually a saving we are getting for having debt in the capital structure, why are we deducting?
I will appreciate your respond.
~ still here watching your awesome lectures. Thank you.December 16, 2023 at 4:59 am #696862Wait. Is it to take out the effect of debt from the flow? Effectively computing cash available to all finance providers.
December 16, 2023 at 9:20 am #696868Without seeing the actual question it would seem that they are adding back the interest because the free cash flow is the cash available for all investors (debt and equity), it is only when looking at the free cash flow to equity that debt interest is subtracted. When adding back the interest to the profit after interest we also need to remove the tax saving on the interest.
December 17, 2023 at 2:22 pm #696946Got it. Thank you.
December 18, 2023 at 8:34 am #696985You are welcome 🙂
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