increasing debt does not change FCFF?

CFA Level II
#1

Hi, I have a question, in the schweser volume 2 exam 2 morning session question 39, why increasing debt does not change the FCFF. it should increase the FCFF by the amount of after tax interest expense, isn’t it? Thanks.

#2

No effect on FCFF.

#3

In the formula: FCFF = NI + NCC + Int (1-t) - FCinv - WCinv

The increase in after-tax interest expense reduces NI and increases Int(1-t) by the same amount, and so the net effect on FCFF is zero.

#4

thanks for the answer, now i get it.

#5

I always thought it was a better idea to re-read the books instead of giving way too many mocks

#6

Well that is deal about balancing the revision vs practice. You will never know what is right or wrong approach, the only thing you will have is fear in your mind that I wish I would have gone the other route.