sunbo330386373
New member
- Nov 22, 2015
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Hello, everyone
I am very confused with FCFF concept. The book said the FCFF=CFO+Int(1-tax)+CFI. It means the cash flow before debtor and creditor. Here is the part I am confuse.
What if the Interest is caused by a discounted bond? Let’s make a example. A Co. has a revenue of 100( all cash) this year with no other expense, but there is a discounted bond outstanding. The tax rate is 20%.The entry related to the bond is below:
Interest Expense……15
Discount on bond payable……5
cash……10
so Net income before tax is 100-15=85 Tax is 85*20%=17 Net Income is 85-17=68
So what is the FCFF? I have two thoughts in my mind, but i don’t know which one is right? or both of them are wrong
1. Since the FCFF is measure the free cash before debitor and creditor, the FCFF is 100 (cash received) - 17(tax)=83
2.According to FCFF=CFO+Int(1-tax)+CFI. CFO=68+5=73. Now i am not sure Int(1-Tax) part. we use 10 as Int or 15 as Int? I think 10 is right. Because 10 is the real money we will pay to the debitor. then Int(1-tax)=8. The FCFF=73=+8=81
This is $2 gap. I am so confused.
Thanks for the help!!!
I am very confused with FCFF concept. The book said the FCFF=CFO+Int(1-tax)+CFI. It means the cash flow before debtor and creditor. Here is the part I am confuse.
What if the Interest is caused by a discounted bond? Let’s make a example. A Co. has a revenue of 100( all cash) this year with no other expense, but there is a discounted bond outstanding. The tax rate is 20%.The entry related to the bond is below:
Interest Expense……15
Discount on bond payable……5
cash……10
so Net income before tax is 100-15=85 Tax is 85*20%=17 Net Income is 85-17=68
So what is the FCFF? I have two thoughts in my mind, but i don’t know which one is right? or both of them are wrong
1. Since the FCFF is measure the free cash before debitor and creditor, the FCFF is 100 (cash received) - 17(tax)=83
2.According to FCFF=CFO+Int(1-tax)+CFI. CFO=68+5=73. Now i am not sure Int(1-Tax) part. we use 10 as Int or 15 as Int? I think 10 is right. Because 10 is the real money we will pay to the debitor. then Int(1-tax)=8. The FCFF=73=+8=81
This is $2 gap. I am so confused.
Thanks for the help!!!