Question #89
Reading: Reading 21 Free Cash Flow Valuation
PDF File: Reading 21 Free Cash Flow Valuation.pdf
Page: 43
Status: Unattempted
Correct Answer: A
Question
An increase in financial leverage will cause free cash flow to equity (FCFE) to:
Answer Choices:
A. increase in the year the borrowing occurred
B. decrease or increase, depending on its circumstances
C. decrease in the year the borrowing occurred
Explanation
An increase in financial leverage will increase net borrowing and, hence, increase FCFE in
the year the borrowing occurred because: FCFE = FCFF – [interest expense] (1 – tax rate) +
net borrowing.