FCFE = NI + depreciation - WCinv - FCinv + net borrowings

but I see aother one like this

FCFE = NI - ( FCinv - depreciation )(1-d) - WCinv ( 1-d)

Please add some comments about the use of this one. why have to multiply with the net of debt reatio? and where is the net borrowing?


Here ya go:


Thank you so much. but still don’t uderstand why depreciation has to be net off with debt ratio?


FCFE=Ni+depr-WCinv-FCinv+ net borrowing

=Ni - (Fcinv-depr+ Wcinv) + netborrowing

= Ni - delta Asset + net borrowing(1)

Debt ratio means how many assets were purchased by debt, so net borrowing <=> debt ratio * delta asset(2)

Delta assets= net assets purchasing in this period=( FCinv-depr)+WCinv

From (1) and (2) <=> FCFE= Ni -delta assets + Delta asset *d

= Ni - delta assets(1-d)= Ni - (FCinv -depr) (1-d) - WCinv*(1-d)

Are u clear with this answer?

so the 2 formulas are equivalent?

there is a key assumption in the 2nd formula - which is

a. the company is a long operating company.

b. has a stable debt ratio

c. that any financing of new WC and excess of (FC over Depreciation) is through debt borrowed at the debt ratio and the rest is financed thro’ the operations.

So the WCInv * DebtRatio + (FCInv - Depr) * DebtRatio -> is the net Borrowing portion.