FCFE and FCFF - effects of financial leverage


Just came across a statement as I was doing CFAI questions:

“Changes in financial leverage (the amount of debt financing in the company’s capital structure) affects FCFE but not FCFF”

How can this be the case if the after-tax interest is a component of FCFF?

From my understanding, as the debt issued by a company grows, the interest cost will rise, increasing the after-tax interest component of FCFF.


from NI you add back Interest(1-tax) to create FCFF. therefore the FCFF is a measure of the unlevered company.

In FCFF, after-tax interest cancels out: subtracted to arrive at net income, then added back.