how the leverage change will affect the FCFE?

CFA Level II
#1

leverage increase will increase debt ratio, also decrease NI, right, base on the following eqution, seems two opposite effects. FCFE=NI-(1-DR)(FCInv-dep)-(1-DR)WCInv

#2

I believe leverage does not affect FCFF or FCFE. I remember reading it in a qbank answer somewhere.

#3

leverage doesn’t affect FCFF but does effect FCFE as higher interest payment will go to the debt holders.

#4

FCFE = NI + NCC - FCInv - WCInv + net borrowing NI does decrease because more interest is going to bondholders, but net borrowing also increases in the above equation, canceling out the effect. (I think this is the case but not 100% positive)

#5

Any deleveraging would be a principal paydown, which would decrease FCFE in the year it occurs, but reduce future interest payments on the principal, which will (obviously) increase future expected FCFE. Of course, if the firm issues more debt, that will increase FCFE in the year it occurs, and reduce FCFE (because of the increased interest payments on the larger debtload) in future years.