In practice problem 1, I don’t understand the treatment of interest expense? Why is it 0 in FCCF and -60 in FCFE??? Shouldn’t it +60 in FCFF and 0 in FCFE? Because you add the interest expense when computing FFCF? and it is not included in computation of FFCE unless you derive it from FFCF then it is subtracted?
The question is from Curriculum or any other source so I can take a look in to that???
Yes curriculum reading 31, practice problem 1
for all the problems in this section … .you are better off setting up a fictitious statement of accounts (start at Net income and all the way down to FCFF or FCFE) and then adjust the item being changed by the +100 as expected and see the impact on the FCFF and FCFE as the case may be.
When Interest Expense increases - FCFF adds back the Tax adjusted Interest Expense – so no change.
FCFE - needs to remove the Tax adjusted Interest Expense - so -60? If 40% is the Tax.
Thank you