Question #133
Reading: Reading 21 Free Cash Flow Valuation
PDF File: Reading 21 Free Cash Flow Valuation.pdf
Page: 65
Status: Unattempted
Question
The repayment of a significant amount of outstanding debt will cause free cash flow to equity (FCFE) to:
Answer Choices:
A. remain the same
B. increase
C. decrease
Explanation
Debt repayment will decrease net borrowing and, hence, decrease FCFE because: FCFE =
FCFF – [interest expense] (1 – tax rate) + net borrowing.