Net borrowing

New debt raised less debt repaid in a period. Added in FCFE because borrowed cash is available to shareholders, which also means borrowing can flatter FCFE.

Where you will meet it

Net borrowing appears in 8 learning outcomes on the CFA syllabus. A few of them:

• Explain why free cash flow to equity can serve as the basis of a valuation
  CFA Level I · Equity Investments

  “Free cash flow to equity is what could be paid to shareholders after operating expenses, interest, taxes, working capital and capital expenditure, and after net borrowing.”

• Derive FCFF and FCFE, the free cash flows to the firm and to its shareholders, using the cash flow statement
  CFA Level I · Financial Statement Analysis

  “Free cash flow to equity starts from operating cash flow, subtracts capital expenditure and adds net borrowing.”

• Explain which adjustments turn EBIT (pre-interest, pre-tax earnings), EBITDA, net income and operating cash flow (CFO) into FCFF and FCFE
  CFA Level II · Equities

  “FCFE is FCFF less after-tax interest plus net borrowing.”

• Contrast what FCFF, FCFE, dividend and residual income models each need as inputs
  CFA Level I · Equity Investments

  “The free cash flow to equity model uses cash left for shareholders after investment and net borrowing, FCFE = CFO - FCInv + net borrowing, also at the cost of equity.”

Practise it

• Today's practice question One question, with every wrong option explained.
• Free Level I diagnostic test Twelve questions that show which topics to start with.
• Free finance calculators Check your arithmetic on the exam's core formulas.

All terms beginning with N · Glossary