Net borrowing

CFA Level II
#1

In the context of FCFE what are the constituents of net borrowings?

#2

Net borrowing = new debt issues - debt repayment. If positive, more cash is avail to equity holders so dividend may be paid off or stocks repurchased. A company may roll over debt forever under some circumstances.

#3

So if given 2014 and 2013 balance sheets you would find net borrowing by looking at the movement during the year? Are we talking about LTD only or total debt?

#4

Better estimation you will find looking at CF statement rather than at BS. If CFF is positive and high, net borrowing within period was positive. As I said, a company may roll over debt continuously so debt term structure doesn’t matter in this case.

#5

OK fair enough. Still the exam may not provide CF statements so NI approach will be used.

#6

For the exam, details for required answers should be provided.

#7

Fairy enough though I have a question:

FCFE situation

in context of debt adjustments how do you treat amortization of debt discount?

Should we deduct this discount from debt increase calculation (i e end Debt = 308 beg debt= 269 debt increase = 39 and amort of discount 3 thus debt increase is only 39-3=36

Is this correct anyone?

thanks

R

#8

In context of debt adjustment for FCFE (net borowings) you consider only pure received/paid cash flow.

In my opinion, under various GAAPs and tax law treatment an interest expense due to taxation may be affected by discount.

Anyway, this may be out of scope of exam.

#9

I usually just look for balance sheet changes in long term debt and notes payable.

#10

iSsuing preferred stock is also a borrowing right.

#11

Correct. This is borrowings without tax shield, thus expensive source of financing.

Gigaloo correctly explained on neighbour topic about same query.