Hi folks,
In forecasting FCFE and FCFF reading, why do we not consider the funding aspect for non Incremental Fixed capital investments ( Fixed capital investment which is less than or equal to depreciation) , it can also be funded in some debt ratio, right ? Then why do we consider only Incremental fixed capital investments in the calculation/formula… Anyone pl. help in this.
I have these formulas on hand:
FCFF = NI + NCC + Int*(1 - tax rate) - FCInv - WCInv
FCFE = NI + NCC - FCInv - WCInv + Net borrowing
In the case of FCFF, debt is not considered because we want to calculate cash for both shareholders and debtholders, so your question doubt doesn’t apply here.
In the case of FCFE, debt is indeed considered in “Net borrowing”, so yeah, if you invest in some fixed assets with some level of leverage, FCFE will take that debt on consideration.