FCFF & FAFE adjustments

Hi there,

Can anyone tell me about the adjustments to FCFF & FCFE if underestimates the interest expense for $78000, and the tax rate is 20%?

For me, the FCFE adjustment should be 0, and the FCFF should be added back 7800080%. But the correct answer is FCFE to decrease 7800080% & FCFF remain unchanged.

Lots of thanks,

New FCFE = (NI - 78000*0.8) + NCC - WCInv - FCInv + NB = Old FCFE - 78000*0.8;
New FCFF = (NI - 78000*0.8) + NCC - WCInv - FCInv + (Interest0.8 + **780000.8**) = Old FCFF.

Hey Humbler,

Thank you for the detailed answer!

But I’m still confused about what does the ADJUSTMENT mean here. Isn’t it want us to make the OLD = NEW although the mistake happens? In that way, we should increase the old FCFE in order to equal to the original FCFE.

Or, does the ADJUSTMENT only mean the underestimation effect to the old numbers?

Kind regards,