Why is net borrowings added to the FCFE equation?
FCFF = NI + Interest(1-t) + depreciation - FCinvestment -
WCinvestment
FCFE = NI +Depreciation - FCInvestment - WCInvestment + Net
borrowings
In FCFF we have to deduct all fixed capital investment and
change in working capital because we have to calculate free
cash to the firm(after deducting all capital expenditure).
But,
When we have to calculate FCFE we have added back the
borrowings because we have to calculate free cash flow to the
equity not to the firm. Company issue new debt and payout
proceeds as dividend.
Added Net borrowings because the amount isused by directors for
investment but out or even paying dividend to shareholdes.
Net Borrowings = New Debt - repayment of old debt
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