medium · Principles of Finance

How does an increase in the marginal tax rate typically affect the FCFE of a levered firm, assuming EBIT and Interest Expense remain constant?

1. FCFE increases because the interest tax shield becomes more valuable.
2. FCFE decreases because the higher tax rate reduces the firm's Net Income.
3. FCFE remains unchanged because taxes are only calculated at the firm level (FCFF).
4. FCFE increases because depreciation tax shields are amplified.

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