Two Different Ways to Calculate Net Borrowing in FCFE Perpetuity

15 Pages Posted: 29 Jan 2020 Last revised: 30 Jan 2020

See all articles by Ricardo Goulart Serra

Ricardo Goulart Serra

Fundação Escola de Comércio Álvares Penteado (FECAP); Insper Institute of Education and Research

Date Written: January 29, 2020

Abstract

When finance textbooks address net borrowing calculation in free cash flow to equity perpetuity, they predominantly do it as the proportion of firm net investment financed by debt (Alternative 1). This method does not apply to all scenarios and requires a peculiar debt ratio. Alternatively, one can calculate net borrowing by applying sustainable growth rate to existing debt (Alternative 2). This method is broader and of simpler implementation. Alternative 1 can lead students, instructors and practitioners to confusion and, therefore, to misapplication and/or misuse. I suggest that neglected Alternative 2 becomes the standard method.

Keywords: FCFE, Free Cash Flow to Equity, Perpetuity, Net Borrowing, DCF, Discounted Cash Flow

JEL Classification: G32, G11, G35

Suggested Citation

Serra, Ricardo Goulart, Two Different Ways to Calculate Net Borrowing in FCFE Perpetuity (January 29, 2020). Available at SSRN: https://ssrn.com/abstract=3516402 or http://dx.doi.org/10.2139/ssrn.3516402

Ricardo Goulart Serra (Contact Author)

Fundação Escola de Comércio Álvares Penteado (FECAP) ( email )

Av. Liberdade, 532
Liberdade
São Paulo
Brazil

HOME PAGE: http://lattes.cnpq.br/0957404902684044

Insper Institute of Education and Research ( email )

R Quata 300
Sao Paulo, 04542-030
Brazil

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