FCFF vs FCFE , what does it mean to take after tax EBIT / EBIT *(1-T) while FCFF calc

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Accepted Answer

Taking after tax EBIT / EBIT *(1-T) in FCFF calculation adjusts for taxes and interest expenses.

FCFF (Free Cash Flow to Firm) is calculated before interest and taxes, so adjusting for taxes with after tax EBIT / EBIT *(1-T) accounts for the tax shield provided by interest expenses.
FCFE (Free Cash Flow to Equity) is calculated after interest and taxes, so no adjustment is needed for taxes in the calculation.
By using after tax EBIT / EBIT *(1-T) in FCFF calculation, we are essentially removing the tax shield effect of interest expenses to get a clearer picture of the firm's cash flow available to all stakeholders.
Example: If a company has $1,000 in EBIT, a tax rate of 30%, and $200 in interest expenses, the after tax EBIT would be $700 ($1,000 * (1-0.3)) and FCFF would be calculated using this adjusted EBIT.

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