Increased int exp, effect on FCFF? would, since, amount, increase

BC_MBA_student

Thought this would increase FCFF since you're adding back a greater amount, but no effect per CFA text. Thanks.

giants2010

jgrandits Wrote:
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> But due to the tax shield wouldn't some of the
> additional interest exp flow back to the firm?


NI = (Sales - COGS - int) (1-t)
NI = (Sales - COGS) (1-t) - int * (1-t)

Then FCFF = NI + int(1-t) + ...
FCFF = (Sales - COGS) (1-t) - int * (1-t) + int(1-t)

so you see you are subtracting after-tax interest then adding it back, so if you increase int exp or not, it doesn't matter.

19831985

The effect on fcfe is more likely to be asked.

You'd have to factor in net borrowing to and where the increase in interest came from.

Newhuman

I suggest the best way to start looking at FCFF or FCFE through the EBIT formula.

FCFF = EBIT(1-t) + Dep - INVwc - INVcapex

Theoretically, FCFF should not change as an increase in Interest expense is simply eating away from NI, or equity. As such, FCFF should not change.

Hope this helps!

maryli

FCFF is Free Cash Flow to Firm

It's the cash generation BEFORE any financing decisions. That is why you add back Interest because you want to know how much casn generation occurred even before the bond holders get paid interest.