40
Free Cash Flow to Equity (FCFE)
Net Income – (Capital Expenditure – Depreciation) – (Change in non-cash working capital) –
(Preferred dividends + New Preferred stock issued) + (New Debt issued – debt Repayments)
Table 2.14: Free cash flow to equity1 calculation
From: Investment Valuation Tools and Techniques for Determining the Value of Any Assets
2002
`
While,
when
referring
to
Wild
et
al
(2007,
p.37),
the
free
cash
flow
to
equity
is
calculated using the following formula:
Free Cash Flow to Equity
Cash Flow from operating activities- capital expenditures ±increased or decreased in debt
Table 2.15: Free cash flow to equity 2 calculation
From: Accounting, 2007
Last but not least, the free cash flow to the firm can be calculated by using two
methods. When referring to Damodaran (2002, p.382), the two methods are as
follows:
1. Free cash flow to equity + Interest expense (1-Tax Rate)+ Principle
repayments- New debt issues + Preferred dividends
2. EBIT (1-Tax Rate) + Depreciation – Capital Expenditure- Change in
working capital
Table: 2.16: Free cash flow to the Firm
From: Investment Valuation: Tools and Techniques for determining the value of Any Assets
2002
Furthermore, to some people free cash flow is the cash residual after fulfilling all the
necessary
obligations
and
commitments
to
maintain
operating
activities.
According
to Damodaran (2002, p.385), the commitments include income
taxes, interest
payment, dividends, net capital expenditures and continuing operations.
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