From qn 1 on Valentine TT: “Both free cash flow to the firm (FCFF) and free cash flow to equity (FCFE) are impacted by changes in the firm’s financial leverage”
On the face of it, this statement is incorrect as FCFF is designed to not be affected by changes in leverage. I get that. But if you dig a little deeper isn’t Net Income (arguably the principal component of FCFF/FCFE) affected by financial leverage? A company with leverage may have a larger asset base and may generate higher levels of revenue.
Can someone let me know where I am going wrong here? Is my understanding of FCFE/FCFF incorrect? Does the question assume a single reporting period rather than looking at these measures over multiple periods as I do?