FCFF -- debt to pay dividend company, interest, increase

meghanjackson

when a company issue debt to pay dividend, what is the effect on FCFF?
Doesn't FCFF increase due to increase in interest?

comp_sci_kid

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!

19831985

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.

WarrenB1

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?

bdavi77962

Because NI drops by the same amount as the increase in Int(1-t). INT(1-t) is an addback

Pegasus2008

right i see.. forgot about that.. thanks ramdabom.

kkn006

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.

ayodayo

So is the conclusion, no FCFF does not increase from issuing additional debt.

ningning1984

FCFF = CFO + (1-t)interest - FCInv.

Otabek

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?