Free Cash Flow to Firm (FCFF) / Free Cash Flow to Equity (FCFE)

The FCFF is the cash flow available to debt suppliers and shareholders after all operating expenses have been paid and after necessary investment in working capital & fixed capital have been made.

FCFF = Net Income + Non-cash charges + InterestExpense (1 – tax rate) – Fixed investment – Working Capital Investment

OR

FCFF = Cash flow from operation + X – Fixed Investment

Where X = Interest Expense*(1-tax rate) for US.GAAP (because US GAAP always include Interest Expense as its operation)

X = Interest Expense*(1-tax rate) for IFRS if it classify Interest Expense as operating activity.

Also, X = Dividends paid for IFRS if it classify dividends payment as operating activity.

Recall: In IFRS, Dividends paid can be classified as operation or financing. Also in IFRS, interest expense can be classified as operation or financing too.

Free Cash Flow to Equity

FCFE = CFO + X – Net Borrowing – Net Debt Repayment – Fixed Investment

X = Dividends paid in IFRS if it is classified as operation