Please excuse my confusion on this. I have been studying for 12 hours today and went over some FCFE Q-bank questions and need some clarification. I know Q-bank is pretty much useless, but… So, in some of the FCFE Q-bank questions they give the target DR and use it to calculate FCFE as = NI - [(1-DR)*(FCInv - Dep) - (1-DR)*(NWCInv)] but in the next question they will have the target DR given and not use it at all and just solve for something like FCFE = NI + Dep - WCInv - FCInv +/- NB Am I losing it? Thanks in advance. m
FCFE using the Debt ratio is for forecasting and the only difference in the formula (aside from having to put the debt ratio in it after NI) is that Net Borrowing is removed…this is because the Debt Ratio used in the formula captures the effects of net borrowing already so no need to include it anymore. the two formulas (aside from net borrowing) are identical in terms of making sure NCC is added and FCinv and WCinv is removed…they just apply a weighting to them . so when you see this question just make sure the typical FCFE is applied but forget about Net Borrowing since the debt ratio weightings already take it into account!!
Like I said before: Please don’t try to remember countless formulas. Use the same FCFE that you know. This DR thing is just netborrowing. If they say FCinvest and WCinvest are financed with 30% debt, then you know your netborrowing right there. Just make sure that you apply that to net FCinvestment (i.e., FCInvstm - deprectaion). http://www.analystforum.com/phorums/read.php?12,1266089,1266207#msg-1266207
Thanks MFIN and Dreary for the help! I definitely had a brain cramp last night after a full day of studying. Only a few more days… m