 # Net borrowing

what is exactly net borrowing for free cash flow valuation? I saw the following equation but did not understand how they come up. Net Borrowing = DR(FCInv - Depreciation) + DR * WCInv where DR is target debt ratio ( I guess debt/equity ratio) Does it means that borrowing is only done to buy equipment and inventory? Appreciate for any comments

it means that your investments are financed with both debt and equity. You investments require capital, and this is financed partially by debt. This is your net borrowing.

net borrowing = new debt new debt can be calculated based on net capital investment in quite a few problems just as lxada269 suggested.

i thought net borrowing is just : (borrowing - repayments)?

you are right, cjb001. there are two ways to calculate that though. One: borrowing - repayemnts Two: what it’s used for -> funding capital expenditures

If you’re looking for a formula: net borrowing = (long term debt [t] +short term borrowing [t]) - (long term debt [t-1] - short term borrowing [t-1])

I think something is wrong here: (long term debt [t] +short term borrowing [t]) - (long term debt [t-1] - short term borrowing [t-1]) should instead be (long term debt [t] +short term borrowing [t]) - (long term debt [t-1] + short term borrowing [t-1]) = (long term debt [t] - (long term debt [t-1]) + (short term borrowing [t] - short term borrowing [t-1]) or change in LTD + Change in Short Term Borrowing.

yes you are correct. I placed a “-” rather than “+” for the second half of the equation.

Thanks for all your replies . I understood now.