CFA Practice Question

There are 534 practice questions for this study session.

CFA Practice Question

Assume a 30% tax rate. If the interest expense amount increases by $100, this period's FCFF will ______ and FCFE will ______.
A. increase by $30; increase by $30
B. decrease by $30; decrease by $30
C. not change; decrease by $70
Explanation: Net income will decrease by $70 (30% tax shield). As FCFF = NI + NCC + Int (1 - Tax rate) - FCInv - WCInv, it will not change. However, as FCFE = FCFF + Net borrowing - Int ( 1- Tax rate), FCFE will decrease by $70.

User Contributed Comments 6

User Comment
haosheng Won't change the FCFF at all? I thought it is part of Int(1-T).
Tannenbaum FCFF= NI + NC + Int*(1-T) - deltaWC - Inv
NI will be decreased by Int(1-t) and Int*(1-T) will be increased by the same amount.
atoy This is a tricky one only saw it after reading the explanation
gill15 I didnt even do this section but even if I did I would've been tricked on this one.
jjhigdon FCFF is cash available to equity AND bondholders, so it is not affacted by change in interest expense. FCFE is cash available to just equity holders, so it is reduced by additional amount owed to debt (after tax change in interest expense).
birdperson @jjhigdon -- that actually makes sense... thanks
You need to log in first to add your comment.