Using Levered Free Cash Flow (FCFE) in DCF model doesn't make sense.

Hi everyone,

I'm working on a DCF model and I'm confused about how increasing net borrowings without investing them can increase FCFE.

FCFE is the cash flow available to equity holders. It's calculated by subtracting capital expenditures from cash flow from operations and adding net borrowings (or FCF + Net Borrowings).

In a DCF model, we discount FCFE to the present to estimate the equity value of a company. If we increase net borrowings without investing them, we're simply increasing the company's debt burden and decreasing its equity value. So shouldn't we also subtract discounted net borrowings from enterprise value to adjust equity value (instead of just total net debt, so equity value doesn't change just by increasing debt)?

Here's an analogy:

Imagine a broke guy who borrows $1 million and claims he's a millionaire. Just because he has $1 million in the bank doesn't mean he's actually worth that much. He still has to pay back the loan plus interest.

Similarly, if a company increases net borrowings without investing them, it's simply increasing its liabilities and decreasing its value to equity holders.

Can someone explain why equity value would increase in this case? Maybe it's better to just use basic FCF or capital cash flow?

Thanks, Sc00sh