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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.Wait. Is it to take out the effect of debt from the flow? Effectively computing cash available to all finance providers.
Without 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.
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