Why does an increase in leverage have no impact on FCFF.

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zxfmontreal

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According to the forumla, FCFF=NI+Dep+Int(1-tax)-FCInv-WCInv.
If leverage is increased, interest expense will also be increased. Then why there is no impact on FCFF?
 
zxfmontreal wrote:According to the forumla, FCFF=NI+Dep+Int(1-tax)-FCInv-WCInv.
If leverage is increased, interest expense will also be increased.
Click to expand...
Not necessarily. If you purchase treasury stock, leverage is increased without additional interest.
 
S2000magician wrote:
zxfmontreal wrote:According to the forumla, FCFF=NI+Dep+Int(1-tax)-FCInv-WCInv.
If leverage is increased, interest expense will also be increased.
Click to expand...
Not necessarily. If you purchase treasury stock, leverage is increased without additional interest.
Click to expand...
Then how about normal interest-bearing debt? The definition says “changing the company capital structure by increasing debt will not impact FCFF, although it will initially increase FCFE by the amount of debt issued and then reduce FCFE thereafter by the after-tax interest expense”.
 
zxfmontreal wrote:
S2000magician wrote:
zxfmontreal wrote:According to the formula, FCFF=NI+Dep+Int(1-tax)-FCInv-WCInv.
If leverage is increased, interest expense will also be increased.
Click to expand...
Not necessarily. If you purchase treasury stock, leverage is increased without additional interest.
Click to expand...
Then how about normal interest-bearing debt? The definition says “changing the company capital structure by increasing debt will not impact FCFF, although it will initially increase FCFE by the amount of debt issued and then reduce FCFE thereafter by the after-tax interest expense”.
Click to expand...
Even if interest expense is increased, there is no effect on FCFF.
Note the formula:
FCFF = NI + Dep + Int(1 – tax) – FCInv – WCInv
If interest expense increases, then net income decreases by Int(1 – tax); when we add back Int(1 – tax), it cancels. There is no interest effect on FCFF.
 
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