If net borrowing is the new money raised, it should be added back to both FCFF and FCFE, isn’t it?
Thank you for your answers in advance.
It doesn’t affect FCFF because the firm has to pay it back . . . eventually (unlike cash from sales or cash from issuing equity).
It affects FCFE because it is available to pay dividends.
You may not like the reasoning, but that’s what it is. You cannot change it, and you’d better remember it.
@S2000 Thank you for the reply. Can I understand in this way, the money raised in categorized in CFF, and it’s for the company as a whole, so it doesn’t affect FCFF, but to equity holders, the money is available at their hands, so it affects FCFE.
Think of FCFF as cash flow on a pre-leverage and/or debt financing basis - it’s CF available to be paid out to both creditors and owners. So in some sense, while you have additional money that could be paid out, the inflow (from debt financing) and the potential outflow cancel out.
In contrast, FCFE is CF AFTER leverage/debt financing, and is what’s available to be paid out to stockholders. It starts with FCFF and adjusts it for net money either received from (which INCREASES FCFE) or pad out to (which DECREASES FCFE) creditors. In this case if there was borrowing, there’d be more money available to stockholders.
Thank you very much for the answer. clear now