Net borrowing

CFA Level II
#1

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

#2

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.

#3

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

#4

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

#5

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

#6

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])

#7

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.

#8

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

#9

Thanks for all your replies . I understood now.