Lesson 3 of 5 · 15 min
Free cash flow to the firm and to equity
FCFF is the cash left for all capital providers after operating costs, taxes and investment; FCFE is what is left for common shareholders after lenders have also been dealt with.
In short
- Free cash flow generically means CFO in excess of capital expenditures; for valuation, analysts use FCFF and FCFE.
- FCFF = cash available to debt and equity holders after operating expenses (including taxes) and investment in working and fixed capital.
- From CFO: FCFF = CFO + Int(1 − t) − FCInv. After-tax interest is added back because lenders are among the claimants.
- Adjust for classification: no interest add-back if interest paid sits in financing; add back interest and dividends received placed in investing, and dividends paid placed in operating.
- FCFE = CFO − FCInv + Net borrowing. Positive FCFE is cash available for distribution to owners.
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