FCFE and debt ratio investment, currently, different

defour44

Yes, use target structure if you're given target in the problem. Otherwise, you use current cap structure

dvilayphet

FCFE = NI - (1 - debt ratio) (Cap Ex - Dep) - (1 - debt ratio) (investment in working capital)

What debt ratio do you use if you are given 2 different values?

For instance, homie company will finance 40% of cap ex and working capital with debt financing......the company is currently financed with 30% debt and has a target debt ratio of 30%.

For the formula, do you use 30 or 40%?

thecfawannabe

Since you are forecasting, use the target ratio.

ayaz_mahmud369

yes you use the TARGET ratio

WarrenB1

If the company will finance the fixed assets with 40% debt, the firm's cap structure will effective change. If it currently has 30% debt, after the fixed asset increase, cap structure will change to 35% debt/65% equity. Keep in mind they have a 50% debt target ratio, so the firm will borrow more to turn that 35% to 50%.

1) To calculate FCFE with target ratios, you would use a different formula:
FCFE = NI - (1-DR)*(FC Inv-Dep) - [(1 - DR)*(WC Inv)], of course DR is the target d/a ratio

2) I'm not sure about this one, but I would use 50% personally