Forecasted FCFE

Can someone please help explain the FOrecast FCFE formula?

Net Income - [1 - DR) * (FCInv - Dep)] - [(1-DR) * WCInv]

DR = Target Debt to asset ratio

Why is FCInv - Depreciation?

In the regular formula, its NI + Dep - FCinv - Wciv + net borrowing. Also where is net borrowing?

Thanks!

Net borrowing: In this version of FCFE is calculated assuming the Target Debt/Asset ratio the company will maintain going forward. In effect, the borrowing aspect is embedded in each of the FCinv and WCinv peices of this formula by reducing the equity value for each of those respective components by the target debt ratio. Remeber, FFCE is trying to calculate how much the owners of the equity are truly entitled to recieve after all other stakeholders have been paid.

I’ve come to understand that FCInv is the change in the gross PP&E from 1 period to the next. Therefore, you would want to remove depreciation to calculate the impact of financing the FCInv with debt, since you wouldn’t increase debt to finance a change in value that isn’t well represented in the gross value change… The Equity owners are only entitled to a portion of the non-cash charge benefit for depreciation which is why it’s included within this section of the calculation and not right after NI

In short, this formula is removing the peice of NI that is owned by debt holders.