Heads-Up20: FCFF/FCFE and depreciation

Assuming 40% tax, if depreciation increases by $100, then:

FCFF = NI + Depr + Int(1-t) - FCinv -WCinv,

should increase/decrease by how much?

How about FCFE, increase/decrease by how much?

What if If interest expense increases by $100, what’s the impact on FCFF and FCFE?

NI will be lower by 100*(1-0.4)

Dep will be bigger by 100, so FCFF bigger by 40. same with FCFE

if int exp inc by 100, then you NI will be lower by 100*(1-0.4)

FCFF will add 100*(1-0.4) so no change for him

FCFE will be lower by 100*(1-.4) since you don’T add it to FCFE

  • 40 for both, and -60 for FCFE. This is first problem from free cash flow valuation from EOC. It’s tricky. Strongly recommend to go through it at least one time.

thanks for the tip waldz. just did it and it was worth it.

FCFF:+40, 0

FCFE:+40, -60