1. What is Free Cash Flow to Firm (FCFF), and how does it differ from Free Cash Flow to Equity (FCFE)?

 FCFF is cash that is available to all capital providers of a company, that is, both debt holders and equity holders. This cash flow can be derived as follows: EBIT maybe further adjusted for taxes, working capital changes, and capital expenditures but before any payment is made of debts. On the other hand, FCFE refers to fund available to the equity shareholders, after the debt r ...

FCFE stands for Free Cash Flow to Equity, which is a perfect measure of cash that remains available to fund equity shareholders’ needs after excluding operating expenses, taxes, interests, Cap-Ex, among others. It therefore measures the capacity of a business organization by the quantity of cash that can be paid to the shareholders in form of dividends or by using the cash to purchase its own shares. FCFE plays a useful role in different models of equity valuation including the DCF model wher ...

During the process of company valuation, two concepts are brought to the fore: Free Cash Flow to Firm (FCFF) and Free Cash Flow to Equity (FCFE). Though both methods are used for the estimation of intrinsic value of a business, they are widely different in what they measure and how they are applied. It can be very helpful to know these concepts for investors, analysts, and students of finance.

In this blog, we will break down what FCFF and FCFE are, discuss their formula, point out the ...

Free Cash Flow (FCF): Free cash flow measures the cash it generates after paying for capital expenditures to maintain or expand its asset base. It is one of the most critical measures of financial health for a company, measuring how profitable it is and how much cash a company produces, which could be used for dividends, debt repayment, or reinvestment. FCF is calculated using the formula:

FCF = Operating Cash Flow – Capital Expenditures

Importance of Free Cash Flow

1.Financ ...

Capital Decision-Making

It is the process of evaluating and deciding long-term investment opportunities is capital budgeting in organizations. It includes analyzing the possible projects or investments such as acquiring new machinery, launching new products or facilities to determine whether an investment can be outlasted and considered profitable and aligned according to the strategic goals of the organization. Capital budgeting is fundamentally concerned about the proper allocation of ...

Enterprise Value (EV) is one of the very important financial metrics available that measures overall worth of the company, including market cap, debt and cash. While the market cap informs a simple understanding of company worth, EV extends the measure because, in contrast to equity, liabilities are also counted.

 EV can be computed using the formula: EV= Market Capitalization + Total Debt - Cash and Cash Equivalents

This measure is significant for company comparison- more es ...

Weighted Average Cost of Capital (WACC) is basically defined as the average cost of capital to a firm, weighted in the proportion of each source of capital-debt, equity, and sometimes preferred stock-in its capital structure. If it refers to that return which has to be generated by the company to satisfy its investors either by way of debt or in equity, it is more used to laying down a cost for capital investment of the company holistically and in simple terms-this is referred to as just blen ...

Generally, there are two approaches in the valuation methods. The two approaches are intrinsic valuation and relative valuation. Intrinsic valuation tries to determine an asset's fundamental value by calculating its cash flows and growth, whereas relative valuation measures value through comparison with similar entities in the market.

Relative valuation is one of the widely used techniques by investors, analysts, and other professionals in the finance sector. This technique is very simp ...