medium · Principles of Finance
Why is 'Interest Expense' added back (after-tax) to Net Income when calculating Free Cash Flow to the Firm (FCFF)?
- Because the Cash Flow from Operations (CFO) already includes interest as an investing activity.
- Because interest expense is a non-cash charge under modern accounting standards.
- To remove the effect of the company's financing choices and arrive at a capital-structure neutral cash flow.
- To account for the fact that interest is not tax-deductible in a valuation context.
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