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.