Thought this would increase FCFF since you’re adding back a greater amount, but no effect per CFA text. Thanks.
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.
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!
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.
But due to the tax shield wouldn’t some of the additional interest exp flow back to the firm?
jgrandits Wrote: ------------------------------------------------------- > 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.