Two Different Ways to Calculate Net Borrowing in FCFE Perpetuity
15 Pages Posted: 29 Jan 2020 Last revised: 30 Jan 2020
Date Written: January 29, 2020
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: Suggested Citation