![]() In the 2nd example, we begin with cash from operations (CFO) of $13mm, rather than net income.ĬFO is equal to the sum of net income and D&A, subtracted by an increase in NWC, i.e. That leaves us with $10mm, but then we must subtract the $5mm in debt paydown, which leaves us with $5mm as the FCFE. Next, our D&A assumption of $5mm is added back since it is a non-cash expense, and then we subtract the $3mm in Capex and $2mm increase in NWC. Suppose a company’s net income is $10mm given a 10% net income margin assumption and $100mm in revenue. FCFE Calculation Example (Net Income to FCFE) The calculation of FCFF begins with NOPAT, which is a capital-structure neutral metric.įor FCFE, however, we begin with net income, a metric that has already accounted for the interest expense and tax savings from any debt outstanding. FCFE Formula: Free Cash Flow to Equity from Net Income The one notable exception is financial institutions, since their main source of revenue is interest income – making it unfeasible to separate the unlevered FCF since the business model itself is oriented around financing (e.g., interest income, interest expense, provision for losses). However, in practice, the FCFF approach and unlevered DCF are used across most industries. Furthermore, the correct discount rate to use would be the cost of equity, as the cash flows and discount rate must match up in terms of the represented stakeholders. That said, the FCFE could be equivalent to the FCFF if there is zero debt in the capital structure.įCFEs can be projected in a levered discounted cash flow model (DCF) to derive to the market value of equity. The clear pattern is that these actions benefit the equity holders.Ĭontrast this to interest expense or debt repayments, which solely benefit lenders.
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