Forecast FCFE

FCFE = NI - ((1-D/A) * (FCInv-Dep)) -(1-D/A)*WCInc))

Can someone help explain this equation to me. The debt to asset target ratio makes sense but why do you multiply it by FC-Dep and WC?

It’s the portion of cash investments not financed by debt.

You are essentially subtracting out the equity that is used to finance the net investment because it’s “free cash flow to equity”. You have 40% debt ratio you do 1 - 40% to get 60% equity, you’re subtracting out that 60% only, leaving you the 40% which is the debt that will be borrowed. Net investment is taking out depreciation which makes the equation make sense.

FCFE = Net Income + Depreciation - NWC - CapEx + Net Borrowing

FCFE = Net Income - Portion of equity capital being paid to net cap ex and NWC