Hello all,
- decrease in leverage through a repayment of debt will decrease FCFE in the current year and increase forecasted FCFE in future years as interest expense is reduced.
I know the interest expense is reduced but i thought the interest expense is added first to get FCFF, right? will that offset each other?
- In the Kaplan note, it states that " prior transaction method" is most appropriate when valuing minority (noncontrolling) interests.
a.I am just wondering why it is good for minority interest?
b. Are both of the Guideline Transactions method and Guideline public company mehtod s good for valuing minority interest as well? If not, why?
Many thanks!
Remember, FCFE = FCFF - Interest*(1-t) + Net Borrowing
So, you have deducted the after tax interest expense, and thus there is offset in interest. However, because the debt repayment will form part of your Net borrowings, if your repayment is more that your borrowings, then your Net Borrowings will be negative, which will reduce FCFE.
when you pay off your debt in the first year you reduce the net borrowing so the FCFE reduces, but in the same time there will be no interest in the subsequent periods because your debt has been paid, so the FCFE of next periods will not be reduced by the interest payment because there will be no interest payment (assuming the case of 1 loan only).
What you said makes sense but the Kaplan states that the forecasted FCFE in futures years will INCREASE not decrease as interest expense is reduced on page 149 of the Equity Section.