FCF: New Debt or Equity
Does issuing new debt affect free cash flow calculations to equity holders or free cash flow to the firm calculations? I'd assume new debt is added for cash flow to equity, but would it be for the overall free cash flow? Likewise would new equity flow through as a cash injection for free cash flow to equity holders?
Depends....
FCF is:
EBIT(1-tc) +DA -CapEx -Delta WC
Debt issuances wont change your earnings immediately (However, down the line the operating cash flow will increase as an effect of the leverage. Your interest payments will also increase.)
The change in Working capital could change if you record the debt issuance as a positive change to the current assets. That being said this change is likely negligible if you are using operating working cap.
Is the cash infusion being used for CapEx? if so you can show that.
But it’s not like issuing debt or equity will directly increase cashflows to investors. The money will likely go to finance a project which in turn could increase cashflows.
If that doesn’t answer the question, maybe you could reword it.
Hey thanks for the help. Wouldn't issuing debt increase our cash flow to investors though? They could use that to pay dividends or buyback stock, etc? I would assume issuing equity would not be seen in FCFE but not super sure on that one
I think you can need more info to be at that step.
Free cash flow is amount of cash flow available to investor after making necessary investment for business (CAPEX). Then it could branch out to FCFF and FCFE. Again, cash flow is not like a balance sheet item but result of operation for a given amount of time, so unless you do something with that debt, issuing debt alone will not make any change.
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