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Computing Free Cash Flow To The Firm From The Statement of Cash Flows

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Free cash flow to the firm (FCFF) represents the cash flow generated by a company after operating expenses but before financing-related expenses like debt payments or dividends. It can be calculated from the statement of cash flows or from net income. FCFF is the return to all capital providers and can be used to pay down debt, buy back shares, pay dividends, or retain for future growth. Free cash flow to equity (FCFE) is calculated from FCFF by subtracting interest expenses and adding net borrowing, representing the cash flow available to shareholders. Both metrics are used by analysts and investors to value companies.

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Computing Free Cash Flow To The Firm From The Statement of Cash Flows

Uploaded by

wasium
14 views2 pages
Free cash flow to the firm (FCFF) represents the cash flow generated by a company after operating expenses but before financing-related expenses like debt payments or dividends. It can be calculated from the statement of cash flows or from net income. FCFF is the return to all capital providers and can be used to pay down debt, buy back shares, pay dividends, or retain for future growth. Free cash flow to equity (FCFE) is calculated from FCFF by subtracting interest expenses and adding net borrowing, representing the cash flow available to shareholders. Both metrics are used by analysts and investors to value companies.

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Free cash flow to the firm (FCFF) represents the cash flow generated by a company after operating expenses but before financing-related expenses like debt payments or dividends. It can be calculated from the statement of cash flows or from net income. FCFF is the return to all capital providers and can be used to pay down debt, buy back shares, pay dividends, or retain for future growth. Free cash flow to equity (FCFE) is calculated from FCFF by subtracting interest expenses and adding net borrowing, representing the cash flow available to shareholders. Both metrics are used by analysts and investors to value companies.

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14 views2 pages

Computing Free Cash Flow To The Firm From The Statement of Cash Flows

Uploaded by

wasium
Free cash flow to the firm (FCFF) represents the cash flow generated by a company after operating expenses but before financing-related expenses like debt payments or dividends. It can be calculated from the statement of cash flows or from net income. FCFF is the return to all capital providers and can be used to pay down debt, buy back shares, pay dividends, or retain for future growth. Free cash flow to equity (FCFE) is calculated from FCFF by subtracting interest expenses and adding net borrowing, representing the cash flow available to shareholders. Both metrics are used by analysts and investors to value companies.

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Computing Free Cash Flow to the Firm from the Statement of Cash Flows

Free cash flow to the firm (FCFF) represents the cash flow that a company generates in an accounting period, after paying operating expenses and making necessary expenditures. This cash flow represents the return to all providers of capital, whether debt or equity. It can be used to pay off debt, repurchase shares, pay dividends or be retained for future growth opportunities. FCFF can be calculated from the statement of cash flows as follows: FCFF = Cash flow from operations + After-tax interest expense Capital expenditures Depending on the company being analyzed, investors may want to deduct acquisitions as well as capital expenditures. Essentially acquisitions are a means of buying capacity that could othewise be built through capex.

Computing Free Cash Flow to the Firm from Net Income


Free cash flow to the firm (FCFF) represents the cash flow that a company generates in an accounting period, after paying operating expenses and making necessary expenditures. This cash flow represents the return to all providers of capital, whether debt or equity. It can be used to pay off debt, repurchase shares, pay dividends or be retained for future growth opportunities. The basic calculation is FCFF = NI + NCC + Int (1-T) FCInv WCInv Were NI is net income, NCC is non-cash charges such as depreciation, Int(1-T) is the after-tax interest payments on debt, FCInv is the investment in fixed capital (capital expenditures) and WCInv is the investment in working capital. Investors may want to further distinguish between investments in fixed capital that represent required maintenance and those that are intended to generate growth.

Free Cash Flow To Equity - FCFE


This is a measure of how much cash can be paid to the equity shareholders of the company after all expenses, reinvestment and debt repayment. Calculated as: FCFE = Net Income - Net Capital Expenditure - Change in Net Working Capital + New Debt - Debt Repayment Free Cash Flow To Equity - FCFE FCFE is often used by analysts in an attempt to determine the value of a company. This alternative method of valuation gained popularity as the dividend discount model's usefulness became increasingly questionable.

Computing Free Cash Flow to Equity from Free Cash Flow to the Firm
Free cash flow to equity (FCFE) represents the cash flow a company generates after necessary expenses and expenditures and after satisfying the claims of debtholders. It can be calculated from Free cash flow to the firm (FCFF) as follows: FCFE = FCFF After-tax interest expense + Net borrowing. If the company borrows more in a year than it repays it will have additional funds that could be distributed to shareholders, which is why net borrowing is added to FCFF in order to determine FCFE. Obviously, though, investors would want to consider whether continued borrowing to pay dividends is a sustainable practice.

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