tianxin

" In formula #2, 'net borrowing' is not taken into account since debt is not part of the equity forecast "

I still dont get what you meen by this, net borrowing is taken into account in both equations

The first equation subtracts what we have to pay for investments to get to what is available to equity holders. But it also adds the net borrowing because we can use that new money to pay equity holders.

Second equation, rather than subtract the full investments, then add net borrwing. You just subtract a smaller portion to account for the fact that you will borrow to cover the rest.

So to simplify, say your net income is 20 and you have working cap of 2, fixed cap of 2, dep of 1
you will borrow 40% of your investments

you can either say
fcfe=20-2-2+1+0.4(2+2-1)=18.2


of fcfe=20-(0.6(2+2-1))=18.2

so again, both formulas are doing the same thing, both are accounting of the fact that you will have new debt avialble to pay to your shareholders...

one leaves it up to you to decide how much debt,
the other one builds it in with (1-dr)
but if you use a debt equal to dr in the first formula
basicly the same thing.....


again my friend, while it is nice to know everything, this is a waste of your time
highlight it and think about it after exam, i wasted 100s of hours thinking about such stuff
guess what, it will do me nothing on the exam?