What is free cash flow to equity (FCFE)?

Free cash flow to firm (FCFF) represents the available cash flow for equity holders of the firm. The cash is the remaining cash after paying all its expenses including both operating and capital expenditures (taxes, interest, expenditures etc.). Measures the cash return by a firm to its shareholders.

Formula

The formulae to calculate the FCFE is as follows −

• Free cash flow of equity

Cash (operations) – capital expenditures + net debt (repaid)

• Free cash flow of equity (with net income)

Net income + D&A + changes in working capital + capital expenditures + net borrowings

• Free cash flow of equity (with EBIT)

EBIT – I – T + D&A + changes in working capital + capital expenditure + net borrowings

• Free cash flow of equity (with FCFF)

FCFF – (I*(1-T)) + net borrowings

(Here, D&A = Depreciation and Amortization, I = Interest, T= Tax rate, EBIT = Earnings before interest and tax, FCFF = Free cash flow of firm)

Example

Let us consider the table given below for easy understanding −

Company’s net income (2014) = $ 300 million

Solution

The solution is as follows −

Net income = $ 300 million

Depreciation & Amortization (2014) = $18

Change in working capital = (current asset (2013) – current asset (2014) – (current liabilities (2013) – current liabilities (2014) ⇒ (130-175) – (20 – 20) ⇒ -45

Change in capital expenditure = fixed asset (2014) – fixed asset (2013) ⇒ 280 – 240 ⇒ 40

Net borrowings = difference in short term debt + difference in long term debt ⇒ (35- 20) + (25 +15) ⇒ 15 +10 ⇒ 25

Free cash flow to equity (FCFE) = 300 + 18 – 45 – 40 + 25 ⇒ $ 258 million

Nagasravan Tamma

Updated on: 06-Jul-2021

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