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标题: Interest impact on FCFF and FCFE, review [打印本页]

作者: CFA4Techie 时间: 2011-7-13 13:29 标题: Interest impact on FCFF and FCFE, review

If depreciation increases by $100, FCFF = NI + NCC + Int(1-t) - FCinv -WCinv, increases by $100(0.40) = $40, assuming 40% tax.

If interest increases by $100, what's the impact on FCFF and FCFE? ... got me the first time.

作者: benbenxiong 时间: 2011-7-13 13:29

FCFF is not affected because we add back the after tax interest expense. FCFE is lower by 60.

作者: maryli 时间: 2011-7-13 13:29

Issuing of shares does not impact neither FCFF nor FCFE, that's what they say in the book. However, if you look at problem 6, page 435 of Equity, they say because FCinv and WCinv are financed 20% by debt, the are financed 80% by equity...then they go on to adjust FCFE by 80%. I don't get it. If issuing stock does not factor into FCFE, why include that in the calculation?

作者: llxx 时间: 2011-7-13 13:29

They are not adjusting the share issuance there

they are using the (1-DR) variant of the FCFE Formula and accounting for the Net Borrowing figure...

NI + Depr - FCInv - WCInv + DR(FcInv - Depr + WcInv)
= NI - (1-DR) ( FCInv - Depr + WcInv)

since DR=0.2, 1-DR=0.8

CP

作者: BelalM 时间: 2011-7-13 13:29

DR=0.2
or D/(D+E) = 0.2

So 1/(1+D/E) = 0.2
1+D/E = 1/0.2 = 5
D/E = 4

CP

作者: 19831985 时间: 2011-7-13 13:29

In the first post, if depreciation increases by 100, shouldn't FCFF increase by 100 too? Not 100(1-0.4) like you said..

作者: madaochenggong 时间: 2011-7-13 13:29

Take an example... always helps

Sales = 1000
Depr = 100

No other expenses.
NI = (1000-100) * (1-0.4) = 540

FCFF = FCFE = 540 + 100 = 640

Now Depr + 100 = 200
NI = (1000-200) * (1-0.4) = 480
FCFF = FCFE = 480 + 200 = 680

So FCFF and FCFE went UP 40 = 100 * 0.4

CP

作者: scarecrow 时间: 2011-7-13 13:29

Had made a mistake

DR=0.2
or D/(D+E) = 0.2

So 1/(1+D/E) = 0.2
1+E/D = 1/0.2 = 5
E/D = 4

D/E = 0.25 <-- this is right

CP

CP

作者: liquidity 时间: 2011-7-13 13:30

CP, why r u saying if DR = 0.2 then D/E = 0.25. IS DR not already the debt to equity ratio. Please let us clarify this urgently

作者: smuggycfa 时间: 2011-7-13 13:30

> In the first post, if depreciation increases by 100, shouldn't FCFF increase by 100 too? Not 100(1-0.4) like you said..

Yes, it does go up by $100 because we always add dpreciation back, but in addition when depreciation goes up by $100, your NI gets hurt by 0.40 x $100, so subtract that.

作者: giants2010 时间: 2011-7-13 13:30

debt ratio DR = debt (d) divided by total capital (d+e)

while d/e is just that!

it is similar to mark-up and margin, one can easily be converted to the other.

作者: Houjichasan 时间: 2011-7-13 13:30

janakisiri clarified this somewhere else.

If Debt ratio = 0.25, then D/E = 0.25/0.75 = 1/3
If Debt ratio = 0.30, then D/E = 0.3/0.7 = 0.429
If Debt ratio = 0.5, then D/E = 0.5/0.5 = 1.0
If Debt ratio = 0.95, then D/E = 0.95/0.05 = 19

etc

If D/E = 0.25/0.75, then Debt ratio = 0.25
If D/E = 25/75, then Debt ratio = 0.25
If D/E = 40/60, then Debt ratio = 0.40

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