Cyclopedia Of Economics 1st edition


FCFE = Operating Cash Flow MINUS Cash needed for meeting growth targets



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FCFE = Operating Cash Flow MINUS Cash needed for meeting growth targets

Where:


Operating Cash Flow = Net Income (NI) PLUS Depreciation and Amortization

Cash needed for meeting growth targets = Capital Expenditures + Change in Working Capital

Working Capital = Total Current Assets - Total Current Liabilities

Change in Working Capital = One Year's Working Capital MINUS Previous Year's Working Capital

The complete formula is:



FCFE = Net Income PLUS

Depreciation and Amortization MINUS

Capital Expenditures PLUS

Change in Working Capital

A leveraged firm that borrowed money from other sources (even from preferred stock holders) exhibits a different free cash flow to equity. Its CFCE must be adjusted to reflect the preferred dividends and principal repayments of debt (MINUS sign) and the proceeds from new debt and preferred stocks (PLUS sign). If its borrowings are sufficient to pay the dividends to the holders of preference shares and to service its debt - its debt to capital ratio is sound.

The FCFE of a leveraged firm is:




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