Hey all… had a question this morning that asked the effect of additional debt to the FCFF model… and it said no effect If I think logically about it I assume issuing additional debt would increase interest expense… or am I thinking about it incorrectly and it is if the company buys debt it increases interest expense?
Not a tough one, but want to make sure I think about it correctly. thanks all!
While it will increase interest expense, it will simultaneously decrease NI and hence the effects will cancel out.
So in this formula: FCFF = NI + NCC + INT(1-T) - FCINV -WCINV,
NI will decrease and INT will increase by the same amounts and hence cancel out.
Thanks for the response. additional question - why would NI decrease if issuing debt?
because NI is EBIT less interest less taxes
DUH…wow . thank you…makes sense now!