# fcfe formula

When does one use the dr formula and when does one use the basic version

The first is used to forecast FCFE.

As far as I know there isn’t a “basic” version, there are a few options to calc out FCFE, just depends on the inputs you are given.

FCFE DR formula is derived from basic formula only:

FCFE = NI-WCinv -FCInv +Depreciation + Net Borrowing

FCInv +Depreciation = Net FCInv

FCFE = NI-WCinv -(Net FCInv) + Net Borrowing -Equation 1

Now think, You borrowed funds to finanace your FCInv and WCIncv. So

Net Borrowing = FCInV (Net Borrowing) + WCINV (Net Borrowing) -Equation 2

WCinv = D/A*WCinv (Financed from Debt) + E/A*WCinv (Financed from Equity) -Equation 3

Net FCInv= D/A*Net FCInv(Financed from Debt) + E/A*Net FCInv(Financed from Equity) -Equation 4

Add Equation 1,Equation 2,Equation 3 and Equation 4

You will get

FCFE = NI- E/A*WCinv - E/A*Net FCInv

FCFE = NI- (I-D/A)*WCinv -(I-D/A)*Net FCInv

So back to your original question:

You should use DR formula when you are given Individual growth rate of WCINV, FCINV and DR ratio itself.

I noticed in one book it says fcfe-dividends +stocks issued-repuchased =change in cash. Can one calculate fcfe this way also?

it depends how the question is worded and what info is provided… could give you d/e ratio and you go from there

^^I wouldn’t waste the brain space on that formula unless you’ve got some to spare.

Its confusing help me with this, debt ratio is it the same as debt/asset so if ur given 0.4 debt and 0.6 equity were used to finance Fclv and Wclnv the DR will it be 0.4 or we have take 0.4/Asset

It’s 1 - Debt Ratio. So in you’re example above, the correct figure to use is 0.6.

Not entirely sure what you’re getting at with the .4/Assets but remember that Assets = Liabilities + Equity;

therefore -> Liabilities / Assets + Equity/Assets = 1.

Thanks