Change in leverage- impact on FCFF and FCFE

archived_user

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Can someone please explain why a change in leverage has only a minor effect on FCFE and no effect on FCFF?
 
FCFF is the cash flow available to all capital providers, i.e. equityholders and debtholders. If the leverage changes it is not relevant for FCFF, ‘cause only the allocation of FCFF between equityholders and debtholders changes.
FCFE is somewhat different. For example, leverage change ‘cause the firm borrows. In that year FCFE will be higher, because net borrowings increase. In the following year FCFE will be somewhat lower, because the interest payments increase due to the new loan.
Keep in mind: FCFE = FCFF - Int x (1 - tax rate) + net borrowings
 
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