Interest impact on FCFF and FCFE, review interest, impact

CFA4Techie

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.

benbenxiong

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

maryli

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?

llxx

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

BelalM

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

19831985

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

madaochenggong

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

scarecrow

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

liquidity

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

smuggycfa

> 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.