FCFF and FCFE

[gazhoo]

EOC question: Reading 34 Question 1

If net income increases $100 and the tx rate is 40% what is the impact on depreciation?

[cpk123]

are you really asking the right question?

I guess the question is Depreciation increases by 100$ what is the impact on FCFF and FCFE.

[gazhoo]

you are absolutely right. I completely misread the question. thank you.

[knappy]

I like this question, but I’m confused.

If accounts receivable increases by $100, this implies that net income goes up by 100*(1-.4) = 60.

Net noncash charges go down by $100.

The answer given is -100, but I’m getting -40. Can someone set me straight? TIA.

[Aether]

@knappy

I like this question, but I’m confused.

If accounts receivable increases by $100, this implies that net income goes up by 100*(1-.4) = 60.

Net noncash charges go down by $100.

The answer given is -100, but I’m getting -40. Can someone set me straight? TIA.

If A/R increases by 100, you haven’t received any cash. Essentially, you lost a 100 bucks because it is tied into your working capital. So -100 since WC went up by a 100 bucks.

[knappy]

Thanks for pointing out that AR affects WC rather than NCC.

Seems like they must be asking what if AR goes up by $100 but NI is unchanged. In that case the answer is -$100.

[Aether]

@knappy

Thanks for pointing out that AR affects WC rather than NCC.

Seems like they must be asking what if AR goes up by $100 but NI is unchanged. In that case the answer is -$100.

Yea, I was over-analyzing this a bit when I first saw the question, but I think it is implied that everything else is unchanged. I actually went out on a limb to think about the accounting entries (COGS, expenses, etc.) in order to decipher the NI, but I believe it’s unecessary :).