Register now or log in to join your professional community.
Free cash flows are divided into 2 categories.a) Free cash flows available to the firm (FCFF) i.e cash flows available to both equity providers as well as providers of debt. FCFF is the cash-flow available to the firm after all operating expenses, fixed capital investment and working capital investment. FCFF is calculated by adding back non-cash charged such as depreciation to net income. Interest expense is deducted when calculation net income. As interest is a cash flow available to providers of debt so interest expense(net of tax) is also added back to net income. The next step is to deduct investment in fixed assets and working capital investment figures. Ones all the adjustments are made the resulting figure is FCFF.FCFF discounted at Weighted Average Cost of Capital (WACC) gives the value of the firm. By deducting the market value of debt from the present value of FCFF we can arrive at the value fo equity.B) Free Cash Flow to Equity (FCFE): FCFE is calculated asFCFF - Interest(1-tax) + Net Borrowing.Free Cash Flow to Equity discounted at the cost of equity gives the value of equity.
