Lesson 3 of 5 · All lessons in this module
  1. Evaluating sources and uses of cash
  2. Common-size cash flow statements
  3. Free cash flow to the firm and to equityVideo lesson
  4. Cash flow performance ratiosVideo lesson
  5. Cash flow coverage ratios

Lesson 3 of 5 · 15 min

Free cash flow to the firm and to equity

FCFF is the cash left for all capital providers after operating costs, taxes and investment; FCFE is what is left for common shareholders after lenders have also been dealt with.

In short

  • Free cash flow generically means CFO in excess of capital expenditures; for valuation, analysts use FCFF and FCFE.
  • FCFF = cash available to debt and equity holders after operating expenses (including taxes) and investment in working and fixed capital.
  • From CFO: FCFF = CFO + Int(1 − t) − FCInv. After-tax interest is added back because lenders are among the claimants.
  • Adjust for classification: no interest add-back if interest paid sits in financing; add back interest and dividends received placed in investing, and dividends paid placed in operating.
  • FCFE = CFO − FCInv + Net borrowing. Positive FCFE is cash available for distribution to owners.

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