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# How would the following items affect FCFF?

LondonPosts: 749 Sr Portfolio Manager
The question is:

Assuming a FCFF figure for year 1 is £1m, for the items below calculate how a £200k increase in each item below would impact on FCFF. Assume where relevant a tax rate of 20%.

1. Depreciation (assuming it is tax deductible)
2. Accounts receivables
3. Interest expense

1. +40k
2. -200k
3. no impact

I understand #2 and #3 but i couldn't figure how the logic for #1.

I thought the formula for FCFF is NI + NCC(noncash charges e.g. depreciation) - WCInv + Int * (1-tax) - FCInv

So why was the increase only 40k and not 200k ?

Even if it's 'tax deductible' shouldn't it be +160k?

• What he said.
Look me in the eyes. It's okay if you're scared, so am I. But we're scared for different reasons. I'm scared of what I won't become, and you're scared of what I could become.
• London - UKPosts: 1,528 Jr Partner
edited April 2013

What he said.

@mattjuniper no, you're not picking up an easy badge that way!
Homer: He might have all the money in the world, but there’s one thing he can’t buy. Marge: What’s that? Homer: .......A dinosaur The Simpsons
• @Zee Ha I wish! Actually I had nothing more to add. @Fabian covered it off beautifully!
Look me in the eyes. It's okay if you're scared, so am I. But we're scared for different reasons. I'm scared of what I won't become, and you're scared of what I could become.
• Thanks @mattjuniper!
This is CFA!!!
• Posts: 33 Associate
Would preferred dividends be taxed when adding to get FCFF, like interest?
• Posts: 33 Associate
Never mind, they're not taxed. Just added.

We addressed this, but would deferred taxes come into play for FCF formulas in the equity section? (I think not...)