worth sharing … What is the impact on FCFF and FCFE of a $100 increase in each of the following: 1. Depreciation FCFF FCFE a. +100 +100 b. +60 +60 c. +40 +40 d. 0 0 2. Interest expense a. FCFF FCFE a. +60 0 b. 0 -60 c. -60 0 d 0 0 These are simple but tricky… Answers???

A A

A A - Interest is not added back to FCFE calculations…

A B

Right A&A, assuming 40% tax, but you could have deferred it from the answers as well…

Are you thinking net borrowing Niblita75?

If you increase depreciation, wouldn’t that lower NI but raise NCC cancelling each other out, except you get a tax benefit for depreciation, so it would be a 40 dollar increase in FCFE assuming 40% tax rate?

Nope, I forgot about that. But how do you know that he didn’t retire $1,000 worth of principal?

CB

AA

I guess it depends if you assume you start with finished FCFF&FCFE and add the additional info, or start all over again with the additional info of depr. and int. I just assume he didn’t retire debt coz it’s not stated.

sorry folks, the assumption is a 40% tax rate please

D NI includes a reduction for depreciation. So any increase would be cancelled out for both FCFF and FCFE B Again, interest expense is again added back in the case of FCFF, so any increase would be cancelled. For FCFE, a further interest expense has incurred and has to be subtracted further from NI, hence the decrease. ??

Answers?

WTF? Tax rate 40% I’m assuming. Also, how do we know what we’re starting with FCFF that’s already added I(1-t) and then we have to subtract it for FCFE, OR, if we haven’t included it in the initial calc. Where’d you get this BS vague question from, bruv>?

oops… forgot the taxes…so its C B

hk Wrote: ------------------------------------------------------- > I guess it depends if you assume you start with > finished FCFF&FCFE and add the additional info, or > start all over again with the additional info of > depr. and int. > > I just assume he didn’t retire debt coz it’s not > stated. Depreciation: No difference. If you start with “finished” FCF_, then you need to add $40 to FCF - the tax saved is the only effect on cash of increased depr (again, assuming 40% tax rate). If you start all over again, you will end up with the same number. so that’s C Interest expense: For FCFF, as you add the interest back, the only change is the effect of the tax shield, which is +$40. For FCFE, you deduct the net interest, which is -$60. So E) +40, -60.

quantforCFA Wrote: ------------------------------------------------------- > oops… > > forgot the taxes…so its > > C > B I agree with that answer, I kept thinking about just adding the full non cash charge.

CB, assuming 40% tax

To think way too much into it, could the increase in interest expense be caused by an increase in borrowings? I’d love to see the answers…