Chartered Financial Analyst (CFA) Level 1 Practice Exam

Disable ads (and more) with a membership for a one time $2.99 payment

Prepare for the CFA Level 1 Exam with comprehensive study guides. Access multiple choice questions and detailed explanations to enhance your readiness. Start your journey to become a Certified Financial Analyst today!

Each practice test/flash card set has 50 randomly selected questions from a bank of over 500. You'll get a new set of questions each time!

Practice this question and more.

What effect does Net Borrowing have on Free Cash Flow to Equity (FCFE)?

It increases the FCFE
It decreases the FCFE
It has no effect on the FCFE
It impacts only long-term liabilities

The correct answer is: It increases the FCFE

Net Borrowing has a direct impact on Free Cash Flow to Equity (FCFE) because it represents the amount of money a company raises or pays off in debt during a given period. FCFE is defined as cash flows from operating activities minus capital expenditures and debt repayments, plus new borrowings. When a company nets increases in borrowings, it typically increases the cash available to equity holders, thereby enhancing FCFE. This is because new borrowings provide additional cash that can be used for various purposes, including financing growth opportunities or paying dividends to shareholders. Essentially, when a company takes on more debt, it can increase its cash reserves, which in turn elevates the liquidity and cash flows available for equity investors. Therefore, since net borrowing increases the amount of cash available to equity holders, stating that it increases FCFE captures the relationship effectively. This understanding helps to clarify how capital structure decisions can influence shareholder value.