spartanag07

I'm always a little weak on the accounting side of things, but here is my best shot.

A) My understanding is that net borrowing is not sustainable (ultimately to be paid back), so it doesn't represent the cash generating power of the firm. Thus it is not included in FCFF.

B) Changes in net debt, however, represent a shift in the division of cash flow between the equity holders and the debt holders. If you increase net borrowing, then equity holders get cash now (net borrowing results), and debt holders get cash later (interest payments). Ultimately these net out to the firm.

I am more confident of the FCFE statement than the FCFF statement.