Capital structure change: A change in capital structure will only have a small impact on future FCFE. Specifically, an increase in the amount of debt a firm issues will increase future interest expense and decrease future FCFE. (Study Session 12, LOS 47.h) I understand the small change in FCFE part, but if debt increases doesn’t this mean net new borowing increases? FCFE = NI +dep -FC -WC + net borowings… How does this make FCFE less? OR does it make FCFE more NOW and future less. Can someone give the whole picture here?
Makes FCFE more now by the amount of Net Borrowing, but you will incur higher interest costs in the future so it will be less in the future.
yes, tas correct… furthermore… if a firm decreases leverage… reduce borrowing… it will only decrease current FCFE but future FCFE will be higher as interest expense is reduced… the big picture… … FCFE only has a minor affect.