How would a $100 increase in interest expense effect: FCFF? FCFE? The answer for FCFF is that is has no effect (0) on FCFF. This is where I’m confused. One of the more basic formulas for FCFF is: Net income + NCC + Interest (1-tax) - FCI - WCI. Why would a $100 increase have NO EFFECT on FCFF? The answer for FCFE is -60. Again, I’m confused. Interest is absent from the formula: Ni + NCC - FCI - WCI + NB. Anythings helps, thanks.
The $100 in extra interest is already accounted for in your net income (after tax). So adding it back just nets it out. For FCFE, your net income is reduced by the after tax amount of the increased interest cost. Since you don’t add back what was taken out, you have lower FCF.
Here’s another way to look at it - FCFF is an unlevered cash flow. It’s the total FCF that is distributable to either creditors or shareholders. So, a change in interest expense affects the ALLOCATION of FCFF between creditors and stockholders, but it doesn’t affect the LEVEL of FCFF or