Use the information for the question(s) below.
Fly by Night Aviation (FBNA) expects to have net income next year of $24 million and Free Cash Flow of $27 million. FBNA's marginal corporate tax rate is 40%.
-IF FBNA increases leverage so that its interest expense rises by $1 million,then the amount its Free Cash flow will change is closest to:

Question

Quizplus · Accepted Answer

A) (EBIT - Interest Expense - chg IE)(1 - .4) = NI + chg NI
(-1)(chg IE)(.6) = chg NI
-1,000,000(.6) = -600,000
FCF = NI + Interest expense
chg FCF = chg NI + chg Interest expense = -600,000 + 1,000,000 = +400,000
Or, $1,000,000(.4) = $400,000

Use the Information for the Question(s) Below