FCF effects

CFA Level II
#1

This looks like a gimme, but oh well I don’t get it.

So FCFF is cash flow available to everyone (stockholders, debtholders) and FCFE is cash flow available to stockholders.

from the solutions on page 253 on the equity book:

Tax rate is 40%. An increase of $100 to net income increases FCFF and FCFE by $100. Why is an increase in “cash operating expenses” a decrease $60 in FCFF and FCFE?

Obviously the tax rate is involved to get -60, but what’s the intuition for having a $100 difference for Net Income and a $60 difference for FCFF and FCFE?

#2

Increase in NI is… ,surprise, increase in NI. That’s it. No taxes on NI. It goes directly do FCFs.

However, increase in opearating expenses must go through tax shield and we end up paying only 60.

#3

Got ya, knew it was something easy. For some reason in my head I had Net Income had to be taxed. Taxation was my worst subject in college grrrrrrrr…