Hi there, Can’t figure this one… probably rather simple but Schweser doesn’t seem to include “- net borrowing” converting from FCFE to FCFF. Q62 of Sample Exam 3 in Volume 1 FCFE = NI + dep - FCInv - FCInv - WCInv + net borrowing that makes sense… Now, try this FCFF = FCFE + Int(1-t) - net borrowing Where does the “- net borrowing” come from, surely any additional borrowing is available to fund not just the equity holders but also the debt holders (FCFF)? Also, any simple tips when to remember to add (1-t) to Dep? Cheers David
The only one I know is: FCFE = FCFF - [int x (1-T)] + net borrowing
that net borrowing is money raised after net income and you pay off your bondholders their share.
Are you saying that if you raise money FROM bondholders you can’t include it in the cash available TO bondholders?
No, the definition of net borrowing is: [(2009 Long-Term Debt + 2009 Short-Term Debt) - 2008 LTD + 2008 STD)]
Hey guys, FCFE = NI + dep - FCInv - WCInv + net borrowing = FCFF - Int(1-T) + Net Borrowing. Does that formula look familiar? Now FCFF = FCFE - Net Borrowing + Int(1-T) it is stating FCFF in FCFE terms. so everything’s good.
^^ agree w/ CPK above - but again, who wouldn’t? Just re-arrange the formulas (and hence the signs) and you’ll get what you’re looking for.
Since you started with FCFE and you want FCFF, you will have to deduct net borrowings and add back interest. It is just the opposite how we normally see it. We normally start out FCFF and we calculate FCFE.