标题: FCFF -- debt to pay dividend [打印本页] 作者: meghanjackson 时间: 2011-7-13 14:23 标题: FCFF -- debt to pay dividend
when a company issue debt to pay dividend, what is the effect on FCFF?
Doesn't FCFF increase due to increase in interest?作者: comp_sci_kid 时间: 2011-7-13 14:23
yes, if the debt was issued on the first of the year so as to get the benefit from paying/accruing interest all year long.
NI + Int(t-tax)+WCinv+FCinv= FCFF
Those scientists better check their hypotenuses, dude!作者: 19831985 时间: 2011-7-13 14:23
FCFF will increase because the Interest(1-t) will increase
FCFF = NI + NCC + Int(1-t) - FCinv - WCinv
Edited 2 time(s). Last edit at Sunday, May 29, 2011 at 01:20AM by mbolzicco.作者: WarrenB1 时间: 2011-7-13 14:23
then how do you explain this?
Q. when company X establishes a dividend and issues additional debt, most likely effect on FCFF be:
A. no change
B. FCFF decrease
C. FCFF increase
correct answer is A according to schweser.
vol 2 exam 2 question #39.
can someone shed some light on this?作者: bdavi77962 时间: 2011-7-13 14:23
Because NI drops by the same amount as the increase in Int(1-t). INT(1-t) is an addback作者: Pegasus2008 时间: 2011-7-13 14:23
right i see.. forgot about that.. thanks ramdabom.作者: kkn006 时间: 2011-7-13 14:23
I'm just reviewing this section now, but if FCFF = CFO - Capex, wouldn't the additional interest paid lower CFO? ... never mind, I think I got it from the above.作者: ayodayo 时间: 2011-7-13 14:23
So is the conclusion, no FCFF does not increase from issuing additional debt.作者: ningning1984 时间: 2011-7-13 14:23
But isn't interest and taxes operating cash flow? only principle repayments are financing.
So CFO-interest paid+taxes on interest + (1-t)interest-FCINV
So no impact?作者: CPATrader 时间: 2011-7-13 14:23
It has no effect.
Just do a simple scenario analysis (simplified to ignore WCInv, FCInv and NCC since they aren't relevant --- and we all know dividends dont impact FCFF or FCFE):
Before issuing debt to pay dividends:
EBIT = 50
Int = 10
EBT = 40
Tax (@20%) = 8
Net Income = $32
FCFF = Net Income + Int (1 - tc) + NWInv + FCInv + NCC
FCFF = 32 + (0.8)*(10) + 0 + 0 + 0
FCFF = $40
Now I issue $100 in debt @ 10% to pay dividends:
EBIT = 50
Int = 20 [10 + (0.1 * 100) = 20]
EBT = 30
Tax (@20%) = 6
Net Income = $24
I don't really understand the need for so much of discussion here and the calculations as well. It's obvious that dividends or debt payments/issuances won't affect FCFF since it's a pre-levered cash flow measure. There's no need to check if it through the formula by adding int(1-t) to the net income. It's simply the fact that FCFF does not account for interest or dividends.
Whereas FCFE, is a post-levered measure and hence accounts for interest and net borrowings(debt payments or issuances). Dividend however, is a payment that can be made from FCFE, so it does not affect FCFE. Only leverage would affect FCFE and the effects would be opposite in the year of issuance and subsequent years. If you issue debt today, FCFE increases because net borrowings increase. Future FCFE decreases because interest payments increase. It would be the other way for debt repayment.作者: Newhuman 时间: 2011-7-13 14:23
Anything that is a use (or in other words NOT A SOURCE) of FCFF/FCFE will not affect the FCFF/FCFE.
1) Increase common stock dividends <- use of FCFF / FCFE
2) Repurchasing common shares <- use of FCFF / FCFE
3) Reducing outstanding Long term debt. <- use of FCFF only, NOT FCFE.
