What will be the effect on FCFF if a company establishes a dividend and issues additional debt?
Its answer was no effect.
Fcff would not be increased by interest on add. debt ?
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A dividend payment has no effect either on FCFF or FCFE, since it a not a ‘source’ of FCF but a ‘use’ of FCFE.
For additional debt taken, there would be no impact on FCFF. The same amount of interest would first be subtracted from net income, and then added back. So no impact.
The FCFE would increase by the amount of debt in the year the debt is taken. For subsequent years, the FCFE would decrease by the amount of interest charged. As such, on a present value basis, the effects would partially offset each other, having only a small impact on FCFE.