FCFE: net borrowings wanted, change, correct, additional, net

anish

When adding "net borrowings" to arrive at FCFE, this is simply the change in debt correct (i.e. additional ST debt + additional LT debt)? Just wanted to be sure.

tarunajwani

Hello there everyone.

The concept of net borrowing is as follows

When you calculate FCFE you subtract the whole of FCINV and WCINV whereas we all very well know that a company is financed with both debt and equity. Since we have subtracted whole of the WCINV and FCINV by adding net borrowing we are simple adjusting the FCINV and WCINV for the investment made by equity holders

i.e (-WCINV-FCINV+net borrowings)= portion of the investment attribuable to equity holders.

secondly any current portion of long term debt/notespayable should not be included in net borrowings because this will be paid within the next year so it is not really a free cash flow available to the equity holders.

As regards the question that you have mentioned about the mock exam there are two mistakes in it

1) You do not include cash in calculation for working capital but they have included it.

2) Since they have included notespayable in wcinv already they are just subtracting it from the net borrowing which is again a wrong approach as notespayable should not have been included in wcinv in the first place.

luda002

I think we have consensus that an increase in NP is an increase in net borrowing. Can we also agree that an increase in preferred stock is an increase in net borrowing? We seem to have conflicting statements.

zhaoyp

Yes - issuance of preferred stocks increase net borrowing as they are treated like debt when calculating FCFE. They decrease net borrowing when dividends are paid on them or when they are no longer preferred, i.e. they are converted to common via a warrant or called via an option.

spreads

psriniva Wrote:
-------------------------------------------------------
> All right. after going through all the responses
> above, I am totally confused about how to treat
> the Notes Payable. Some of the responses are
> conflicting with others in this thread.
> Would some one please tell us all how to treat
> Notes payable while calculating Net Borrowing.

I got it.

Anyone get the schweser videos? They have two slides specifically treating Net Borrowing.

Net Borrowing Adjustments

1) Long Term Debt:
- ADD debt issuances to net income to arrive at FCFE
- SUBTRACT debt repurchases from net income to arrive at FCFE
- Net Borrowings = new debt - debt repurchases

2) Notes Payables:
- Increase in notes payables, ADD to FCFE
- Decrease in notes payables, SUBTRACT from FCFE

3) Current Portion of Long Term Debt
- Increase in short term debt, ADD to FCFE
- Decrease in short term debt, Subtract from FCFE

random_walker47

It is increase in LTD MINUS increase in N/P.

This is because N/P will be repaid within the operating cycle so we cannot include it in cash flow available to equity.

FinancialAnaly

so i assume the implication is that the calculation used in question 51 of the mock afternoon session is incorrect?

comp_sci_kid

I am certain that debt payments have to be subtracted.

However I am not sure if new issuance of preferred stock needs to be added or not?

redskins44

FCFE is cash available to equity holders and issuance of equity, share repurchase and payment of didvidend has no impact on it


issuance of common stock is ignored from FCFE , however issuance of preferred stock is included (preferred div treated just like debt without tax shield)

jarobi04

Net borrowings = net increase in notes payable + net increase in LTD + net increase in short term debt - repayments + any new issuance of stock.