medium · Principles of Finance financial-statements-markets-wc

Why is 'Interest Expense' added back (after-tax) to Net Income when calculating Free Cash Flow to the Firm (FCFF)?

1. Because operating cash flow already excludes interest payments entirely from the reported total.
2. Because interest is treated as a non-cash accounting charge under GAAP and IFRS rules.
3. To remove the effect of the company's financing choices and arrive at a capital-structure neutral cash flow.
4. To account for the fact that interest is not tax-deductible for any borrower in a standard valuation model.

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