To install click the Add extension button. That's it.

The source code for the WIKI 2 extension is being checked by specialists of the Mozilla Foundation, Google, and Apple. You could also do it yourself at any point in time.

4,5
Kelly Slayton
Congratulations on this excellent venture… what a great idea!
Alexander Grigorievskiy
I use WIKI 2 every day and almost forgot how the original Wikipedia looks like.
Live Statistics
English Articles
Improved in 24 Hours
Added in 24 Hours
Languages
Recent
Show all languages
What we do. Every page goes through several hundred of perfecting techniques; in live mode. Quite the same Wikipedia. Just better.
.
Leo
Newton
Brights
Milds

Free cash flow to equity

From Wikipedia, the free encyclopedia

In corporate finance, free cash flow to equity (FCFE) is a metric of how much cash can be distributed to the equity shareholders of the company as dividends or stock buybacks—after all expenses, reinvestments, and debt repayments are taken care of. Whereas dividends are the cash flows actually paid to shareholders, the FCFE is the cash flow simply available to shareholders.[1][2] The FCFE is usually calculated as a part of DCF or LBO modelling and valuation. The FCFE is also called the levered free cash flow.

YouTube Encyclopedic

  • 1/3
    Views:
    35 000
    61 581
    98 039
  • ✪ Free Cash Flow to Equity Intro and Example
  • ✪ FRM: Free cash flow, FCFF & FCFE
  • ✪ Free Cash Flow: How to Interpret It and Use It In a Valuation

Transcription

Contents

Basic formulae

Assuming there is no preferred stock outstanding:

where:

or

or


where:

  • NI is the firm's net income;
  • D&A is the depreciation and amortisation;
  • b is the debt ratio;
  • Capex is the capital expenditure;
  • ΔWC is the change in working capital;
  • Net Borrowing is the difference between debt principals paid and raised;
  • In this case, it is important not to include interest expense, as this is already figured into net income.[4]

FCFF vs. FCFE

  • Free cash flow to firm (FCFF) is the cash flow available to all the firm's providers of capital once the firm pays all operating expenses (including taxes) and expenditures needed to support the firm's productive capacity. The providers of capital include common stockholders, bondholders, preferred stockholders, and other claimholders.
  • Free cash flow to equity (FCFE) is the cash flow available to the firm’s common stockholders only.
  • If the firm is all-equity financed, its FCFF is equal to FCFE.

Negative FCFE

Like FCFF, the free cash flow to equity can be negative. If FCFE is negative, it is a sign that the firm will need to raise or earn new equity, not necessarily immediately. Some examples include:

  • Large negative net income may result in the negative FCFE;
  • Reinvestment needs, such as large capex, may overwhelm net income, which is often the case for growth companies, especially early in the life cycle.
  • Large debt repayments coming due that have to be funded with equity cash flows can cause negative FCFE; highly levered firms that are trying to bring their debt ratios down can go through years of negative FCFE.
  • The waves of the reinvestment process, when firms invest large amounts of cash in some years and nothing in others, can cause the FCFE to be negative in the big reinvestment years and positive in others;[5]
  • FCFF is a preferred metric for valuation when FCFE is negative or when the firm's capital structure is unstable.

Uses

There are two ways to estimate the equity value using free cash flows:

  • Discounting free cash flows to firm (FCFF) at the weighted average cost of capital (WACC) yields the enterprise value. The firm’s net debt and the value of other claims are then subtracted from EV to calculate the equity value.
  • If only the free cash flows to equity (FCFE) are discounted, then the relevant discount rate should be the required return on equity. This provides a more direct way of estimating equity value.
  • In theory, both approaches should yield the same equity value if the inputs are consistent.

References

  1. ^ "Free Cash Flow To Equity - FCFE". investopedia.com. Retrieved 2015-02-13.
  2. ^ "Free Cash Flow - Valuation". cfainstitute.org. Archived from the original on 2015-02-13. Retrieved 2015-02-13.
  3. ^ Damodaran, Aswath (1999). Investment Valuation: Tools and Techniques for Determining the Value of Any Asset. John Wiley & Sons. ISBN 978-1118011522.
  4. ^ "Free Cash Flow to Equity". financeformulas.net. Retrieved 2015-02-18.
  5. ^ "The Little Book of Valuation". stern.nyu.edu. Retrieved 2015-02-18.

External links

This page was last edited on 25 January 2018, at 13:26
Basis of this page is in Wikipedia. Text is available under the CC BY-SA 3.0 Unported License. Non-text media are available under their specified licenses. Wikipedia® is a registered trademark of the Wikimedia Foundation, Inc. WIKI 2 is an independent company and has no affiliation with Wikimedia Foundation.