Free Cashflow to Firm - why is new debt not included?

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giob70

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Just a quick question regarding FCFF.
Why is it that new debt is not included as part of FCFF?
Technically the creditors also have a right to the money they lend, correct?
In other words, if the creditor lent $100MM and the company drew that $ and kept it in cash, FCFF would ignore this $100 MM as cash available to pay creditors, when in fact it is, correct?
Many thanks!
 
Your interest burden also increases, but since that isn’t captured in fcff, then we can’t assume that debt issuance and repayment is part of free cash flow, to keep consistent. We assume that any new debt will be used on capital expenditure, and not more cash available to claimholders. It does count towards equity however.
 
Thank you. This makes partial sense, but post-tax interest expense is included in FCFF, as a payment to debtholders.
FCFF = NI + NCC + [Int x (1-tax rate)] – FCInv – WCInv
 
I would think that it is not included because you will have an offsetting liability that the debt hodlers have claim too. So it would be redundant to include cash available in FCFF when you would subtract it because it is also money owed. We do include the interest cost however, because debt holders have claim to the cash flow before the itnerest charge is made.
Please correct me if wrong.
 
giob70 wrote:
Thank you. This makes partial sense, but post-tax interest expense is included in FCFF, as a payment to debtholders.
FCFF = NI + NCC + [Int x (1-tax rate)] – FCInv – WCInv
Click to expand...
After tax interest costs are added back to net income because FCFF is cashflow available to all claimholders. Debt is a liability and not a source of residual cash. For equity cash flows, we remove the claims of debt holders and are left with cash flow after paying interest but before common dividends, net debt issuance is also part of FCFE because debt is a different source of financing, and can be used to pay off claims to shareholders by changing the capital structure. Just as FCFF does not include reciepts from raising equity.
Someone correct me if I’m wrong, I haven’t read L2 yet.
 
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