Free Cash Flow to Equity/Firm
I’m having trouble understanding this topic. I’ve searched AF for previous links on this topic but nothing really helped.
Can someone explain what exactly FCFF/E is all about. Why is it important and what does it tell you?
In Scheweser these are the formulas:
FCFF = NI + NCC + [Int * (1 - t)] + FCInv - WCInv
where:
NI = net income
NCC = noncash charges (depreciation and amortization)
Int = interest expenses
FCInv = fixed capital investments (net capital expenditures)
WCInv = working capital investment
what weird though is that in one of the Schweser practice exams answer it has the following:
FCFF = CFO + Int(1- t) - capital expenditures (is this just another way of expressing using indirect method conversion, apologies, I’m really shaky on FRA stuff)
and
FCFE = CFO - FCInv + net borrowing
where:
net borrowing = debt issued - debt repaid
I’m trying to memorise this stuff out of understanding rather than just formula memorisation. If someone can clarify these formulas, that would be greatly appreciated.
Also, interested in understanding where and why the 2 formulas are different (i.e. what is one telling vs. the other).
Thanks |