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.

Houjichasan

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

giants2010

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.

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.

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

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

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

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..

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

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