# A decrease in leverage will affect FCFE but not affect FCFF ?

According to the notes :

Changes in leverage will have a small effect on FCFE. For example , a 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.

But I recall a formula stating that :

FCFE=FCFF-interst(1-t)+net borrowing

According to this formula , decreaing in FCFE will also decrease FCFF .

So , now the logic is a decrease in leverage will decrease FCFE in the current year , which leads to a decrease in FCFF.

However, the note declares that changes in leverage have no effect of FCFF

i dont follow you there - FCFE is the dependent variable, the only thing you can play around with is the amount of leverage?

Just move the latter two items from one side of an algebraic equation to the other side :

FCFE+interst(1-t)-net borrowing=FCFF

Then you will see a decrease in FCFE will decrease FCFF , holding the other two items constant .

bit leftfield but ok… so you want to decrease FCFE and you do that by buying a new warehouse in cash.

whats the question again?

Changes in leverage have no effect on FCFF, assuming that the change in capital structure do not affect the cash flows positively or negatively.

However, changes in capital structure do effect FCFE, since cash might be payed or recieved from debt, along with their effects on interest expense.