Free cash flow to equity

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.

Basic formulae

Assuming there is no preferred stock outstanding:

 FCFE = FCFF + Net\ Borrowing - Interest*(1-t)

where:

or

 FCFE = NI + D\& A - Capex - \Delta WC + Net\ Borrowing

where:

FCFF vs. 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:

Use

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

References

  1. "Free Cash Flow To Equity - FCFE". investopedia.com. Retrieved 2015-02-13.
  2. "Free Cash Flow - Valuation". cfainstitute.org. 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

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