19.03.2023 - 08:36

Indicate the effect on this period’s FCFF and FCFE of a change in each of the items listed below. Assume a $100 increase in each case and a 40 percent tax rate. A. Net income B. Cash operating expenses C. Depreciation D. Interest expense E. EBIT F.

Question:

Indicate the effect on this period’s FCFF and FCFE of a change in each of the items listed below.

Assume a $100 increase in each case and a 40 percent tax rate.

A. Net income

B. Cash operating expenses

C. Depreciation

D. Interest expense

E. EBIT

F. Accounts receivable

G. Accounts payable

H. Property, plant, and equipment

I. Notes payable

J. Cash dividends paid

K. Proceeds from issuing new common shares

L. Common stock share repurchases

Answers (1)
  • Connie
    April 3, 2023 в 18:03
    A. An increase in net income will increase FCFF and FCFE. This is because net income is a component of FCFF and FCFE calculations. B. An increase in cash operating expenses will decrease FCFF and FCFE. This is because higher expenses lead to lower cash flows. C. An increase in depreciation will increase FCFF and FCFE. This is because depreciation is added back to net income in the FCFF and FCFE calculations. D. An increase in interest expense will decrease FCFF and FCFE. This is because interest expense is subtracted from operating cash flows in the FCFF calculation, and from net income to calculate FCFE. E. An increase in EBIT will increase FCFF and FCFE. This is because EBIT is a component of FCFF and FCFE calculations. F. An increase in accounts receivable will decrease FCFF and FCFE. This is because an increase in accounts receivable means that cash has not yet been received for products or services sold. G. An increase in accounts payable will increase FCFF and FCFE. This is because an increase in accounts payable means that cash has not yet been paid for products or services received. H. An increase in property, plant, and equipment will decrease FCFF and FCFE. This is because an increase in capital expenditures (which includes purchases of property, plant, and equipment) decreases cash flows. I. An increase in notes payable will increase FCFF and FCFE. This is because notes payable are a source of financing for a firm. J. Cash dividends paid will decrease FCFF and FCFE. This is because dividends are paid out of cash flows. K. An increase in proceeds from issuing new common shares will increase FCFF and FCFE. This is because issuing new shares provides a source of financing for the firm. L. Common stock share repurchases will increase FCFF and FCFE. This is because repurchasing shares reduces the number of shares outstanding and increases cash flows per share, which ultimately increases FCFF and FCFE.
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