DR

CFA Level II
#1

I know there was a post about this but I can’t find it anymore… Can anybody help me understand the logic of including the target debt ratio in the FCFE formula?

#2

i think I got it… because the debt part finances the fixed spending, nwc too. so you take into account only outflows for equity

#3

basically you are trying to figure out how much of your equity is going to get used up in your fcinv and your wcinv…hence the (1-DR)… just remember - this is used to FORECAST FCFE…not to calculate current FCFE… The question will probably tell you they’re hoping to finance x amount with m% debt and n% equity. What would your FCFE be if that was the case…

#4

thanks mumu you’re a saver

#5

mumukada can you please look at 10126 from Qbank?

#6

what about it…

#7

why do they use 1-dr for year 0??

#8

ignore the year … another way to think about this …is that by using this formula you eliminate the need to include the Net Borrowing factor…it is incorporated in your (1-DR)… this is what they are doing in the particular question…

#9

so if they say net borrowing is 0 do not use 1-dr if they say that nwc and fcinv are financed at target debt ratio use 1-dr?

#10

I once figured a forcasting problem using the regular FCFE formula and adding back the debt portion of the CapEx and WCap as net borrowing and it comes out the same. Using the ratio just makes the calculation simpler, but having done it the other way it helped me understand it in a logical manner (helps w/ retention). This is what made me hate the MOCK2 corp finance project question where they only calculated the debt portion of the CapEx and not the WCap (this has been argued) b/c all the CF calculations also use the ratio to figure WCap portion funded by equity

#11

yes… i think so…