FCFE when paying back debt

CFA Level II Equities
#1

Hey Guys,

Just hammering out small details and found some inconsistencies in my notes

FCFE in the year you pay back debt, is it higher or lower?

I feel like it would be lower in the year you pay back debt (due to negative net borrowing) and then increase in the years after, due to the fact that you have lower interest cost but what happens to my net borrowing? Is it now lower offsetting any of the saving from the lower interest payment?

Any help would be appreciated

#2

FCFE is lower when you payback debt, remember you add net borrowing (You add new debt and deduct any repayment)

thats why you can’t use it when the capital structure is unstable (your constant payment and issuance of debt will distort FCFE)