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Estimating FCFE when Leverage is Stable


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If you wish to make the assumption that the Debt Ratio remains constant throughout the years, the above formula can be used.

$$ FCFE = \newline +Net\>Income\newline-(1-DR)\>(Cap \>Ex-Depreciation)\newline-(1-DR)\>(Working\>Capital \>Needs) $$

DR = Debt/Capital Ratio

Now, if your Debt Ratio is constant, all your debt repayments have to be covered by new issues of debt, because if you use equity to clear this debt, your Debt ratio will change. This allows the debt to increase as you grow and keep the DR stable.

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Here, try increasing debt ratio. In that regard, basically, more and more of CapEx and WC is being funded by debt, and thus there is more Equity available for the investors. FCFE increases in value

FCFE and Leverage: Is this a free lunch?