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If the depreciation rate increases from 10% to 12.5%, with all else held constant, what will be the effect on the firm’s Free Cash Flows (FCF)?

A. Because the firm’s Debt/Equity ratio is fixed in each year, and because the firm’s Equity is not affected by its depreciation rate, there will be no change in the FCFs.

B. FCF’s will decrease because the additional depreciation (which generates a tax shield) will be more than offset by the increase in Fixed Assets.

C. Since more assets will be purchase if the Depreciation increases, interest changes will be higher, reducing the FCFs.

D. FCFs will increase because higher Depreciation will generate higher tax shields.

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M92174126

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