# FCFF and FCFE

EOC question: Reading 34 Question 1

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

are you really asking the right question?

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

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

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.

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 :).