I've got this question:
Explain why the FCFF does not incorporate interest expenses and what is the potential bias in the valuation if corporate taxes exist.
Now, we know that in the Free Cash Flow to the Firm we do not include interests because we account for the cost of debt capital in the discount rate. But what is the bias when corporate taxes exist? The flows are computed after-taxes, and then discounted. Maybe can emerge a problem when computing the tax shield, but this is easily tackled by using either Weighted Average Cost of Capital (if the project's flows have the same risk of the firm, and the firm keeps constantly the Debt/Value rate constant) or by using Adjusted Present Value when the debt ratio changes during the lifetime of the project.