Answer: No, the analyst should add back after-tax interest expense

## Explanation The analyst is **not correct**. Here's why: ### Correct FCFF Calculation from CFO When calculating Free Cash Flow to the Firm (FCFF) from Cash Flow from Operating Activities (CFO), the correct formula is: **FCFF = CFO + Interest Expense × (1 - Tax Rate) - Investment in Fixed Capital** ### Why After-Tax Interest Expense? - Interest expense is tax-deductible, so the actual cash outflow for interest is the after-tax amount - Adding back the pretax interest expense would overstate the cash flow available to all investors - The after-tax interest expense reflects the true cash impact on the firm ### The Analyst's Error The analyst is: - Adding back **pretax** interest expense instead of **after-tax** interest expense - This overstates the cash flow available to both debt and equity holders ### Correct Approach To properly calculate FCFF from CFO: 1. Start with CFO 2. Add back **after-tax** interest expense 3. Subtract investment in fixed capital Therefore, the correct answer is **C. No, the analyst should add back after-tax interest expense**.

Author: LeetQuiz Editorial Team