# Free Cash Flow by C. Chang

Pages: 0 (656 words) Published: August 30, 2014
Free Cash Flows

Revised by C. Chang. Copyright 1996 by The McGraw-Hill Companies, Inc

OUTLINE
n
n
n
n
n
n
n

What is FCF? FCFF? FCFE?
How Do You Calculate FCFF?
FCFF Calculation– the CFO Method
FCFF Calculation– the EBIT Method
Equivalence: FCFF(CFO) vs FCFF(EBIT)
Free Cash Flow to Equity (FCFE)
Free Cash Flow Example

What is FCF? FCFF? FCFE?

n

Free Cash Flows to Firm (FCFF)
n  The cash produced by the business activities of a firm available for distribution to all claimholders (debt, common equity, preferred equity, option holders),
n

n
n

n

Free Cash Flows to Equity (FCFE)
n

n

After making ALL required investments in the business such as working capital, property and plant and equipment, etc. needed to sustain the firm’s assets and future growth (dependent on
decisions and strategies pursued)
Without taking into account the way the business is financed. Exclude the tax savings from interest, because they are
included in the discount rate, WACC, or separately in APV.

The net CF available for distribution to shareholders after paying for future investments and paying for non-equity holders

If the firm is an all equity firm, then FCFF=FCFE

How Do You Calculate FCFE?
Two Ways of FCFF Calculations
n

CFO (Cash Flow from Operation) Method
n

n

EBIT Method
n

n

n
n

n

Starts from EBIT

To understand FCFs, you must understand
n

n

Starts from After-tax Cash Flow from Operation (Cash Flow
Statement)

Income Statement
Balance Sheet
Statement of Cash Flows

Both produce same FCFF – logic is slightly different
Good idea to calculate both ways – Check errors in
calculation!

FCFF Calculation– the CFO Method
n

Free Cash Flow to the Firm (FCFF) =
Net Income (Profit After Tax)
+ Non-Cash Expense (e.g.. Depreciation, Amortization)
After-tax Cash
– Non-Cash Revenues
Flow from
– Increase in Current Assets*
- (change...