FCFE calculation - Net borrowings

CFA Level II
#1

Hi,

I have a query regarding the net borrowings used for FCFE calculation. We generally assume the net borrowings as a (D/A) ratio times the investments required for CAPEX & Working capital. We subtract the CAPEX (FCInv) & the WC Investments from the FCFF. Sorry if this was asked before, but I can’t understand why we would add the borrowings used to finance the above 2 line items. As i understand, that borrowing is already ‘used’ for the above 2 items, and hence might not be available for distribution to the equity shareholders, right ?

#2

When you talk about the firm (FCFF) - amounts borrowed to finance CAPEX and WCInv - are NOT available.

But when you talk equity holders - there is NO DEBT consideration at all. So those amounts are available to FCFE (Equity)…

#3

techine kid, you add it back becuase you already deducted for the WC/Capex purchase. Sinmple example to illustrate:

The only two transactions all year for a firm are: Borrow $100. Buy a tire for $100.

How much FCF is available to Equity holders?

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Zero. Why? Minus 100 for investment in tire. +100 for net borrowing. = $0. That is why you add it back.