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I did some searching and I came up with the following intuition. FCFF is calculated not to see what cash is available for equity and debt holders, but primarily to evaluate the firm value by discounting it using WACC. And WACC removes the tax shield by reducing the interest rate by tax rate to bring equity and debt on equal footing. So FCFF/FCFE must ignore the cash savings above what is reflected in WACC for debt because that belongs to Debt holders alone. And the tax shield savings is already reflected in NI because interest expense is not taxed at all.



Edited 2 time(s). Last edit at Wednesday, May 11, 2011 at 10:39AM by janardhanc.