I agree with C/B. FCFF = EBITDA(1-t) + Dep * t - Investment FCFe = FCFF - Int(1-t) + Net Borrowing assume EBITDA doesn’t change. so if Dep increases 100, both FCFF and FCFe will increase by 100*40%=40 if Interest increases by 100, no effect to FCFF but decreases FCFe by 100*(1-40%)=60
c b for me too
CB, there should have been a mention on the tax rate, but I assumed 40%
chrismaths Wrote: ------------------------------------------------------- > 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. Agreed
it depends as well whether we are starting with NET income or EBIT for FCFE. The question does not give an indication…
I agree with Wonder…Q is vague. AA and CB could both be right. They make you assume too much…
Actually, I take that back. CFO will have decreased by 60 (-100 int exp, +40 tax), And we add back the net interest expense, not the gross. So that makes the second one B. (oooh, future perfect - the underused tense).
fcff is not impacted by interest so no change in fcff if interest changes
Ya so if this is NI, and interest expense increased, you’d have to add it back so that it doesn’t effect FCFF.
im never trying to figure these out in my head anymore. I writing every thing down into the formulas and see for my self what changes.
what is the answer?
its C & B. 100% confident.
C B Assuming you had the correct FCFF and FCFE before. Depreciation is never considered a CASH FLOW and the only reason you are adding it back is because you subtracted it before. So it doesnt matter what you start with NI, EBIT etc. But you do save 40 bucks of taxes. For interest expense: FCFF is cashflow to firm before ANY interest is accounted for. So increase in interest expense should have 0 effect on FCFF. FCFE will include interest expense, but only -60 because of the 40% tax savings. so -60. Edits: yea C B is correct.
Long, your right that depreciation is not a cash flow, but the additonal tax savings is a CASH FLOW, no?
LongonCFA, you’re ignoring the tax shield effect of depreciation, it saves you 40% of its value in taxes which are real cash flows. So you’re first one isn’t correct. Secondly, alot of you others are looking at this incorrectly, stop worrying about what it was calculated from (NI or EBIT, etc) that is irrelivant, we are looking at the actual impact on those cash flows. I still stand by my prior, CB
yea ure right. CB
i would have gone a,b. guess i would have been wrong.
doworkson I don’t have a good grasp on this but I think you are looking at this backwards… if interest changes FCFF does not change since it’s before interest forget about adding it back to net income ebitda or whatever…
i went C/B (all the A/A had me worried… i’ll have to go back and look as i remember there was an alternative rationale). i also don’t see a tax rate. but i assumed it was 40%
^^ Same here West. I said C/B and no one agreed and was thinking I was going crazy! We still don’t even know what the right answer is. Plus we are all assuming tax rates that aren’t even listed lol!