# Free Cash Flow by C. Chang

**Topics:**Generally Accepted Accounting Principles, Cash flow, Balance sheet

**Pages:**0 (656 words)

**Published:**August 30, 2014

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

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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?

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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),

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Free Cash Flows to Equity (FCFE)

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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

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CFO (Cash Flow from Operation) Method

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EBIT Method

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Starts from EBIT

To understand FCFs, you must understand

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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

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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...

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