I have a quick question about how to calculate FCFE from NI: I was wondering why we don’t add back all depreciation in this calculation: FCFE = NI - (1-DR)(FCInv - Dep) - (1-DR)WCInv ==> FCFE = NI - (1-DR)FCInv + (1-DR)Dep - (1-DR)WCInv Are we assuming that we are only adding back depreciation associated with assets that were financed with equity (based on the current DR)? Best, TheChad
Net Fixed Assets (which is Fixed assets - Depreciation) are assumed to be funded with the target Debt Ratio. Assuming the company is in steady state (given the target debt ratio is used) - assumption is that any new investment in fixed capital is offset exactly by the new depreciation charges. So Net Fixed assets * (1-DR) = Amount of new Equity required for the FCINV portion.