I think some explanations are way to complicated than it needs to be. Net borrowing is applicable ONLY to an equity investor - from a free cash flow point of view. It includes the firm’s newly issued debt minus debt repayments. All this is saying is that if a firm issues $10m worth of bonds and pays down $2m on the outstanding balance of previously issued bonds - both taking place within a fiscal year - then the net borrowing is $8m. Net borrowing = new debt issues - debt repayments Another way to think about this is that debts raised from bondholders effectively benefits equity holders since it increases cash flow to equity. Similarly, any amounts (interest + principal) paid to them decreases the cash flow.
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.
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.
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.