Free Cash Flow to Equity

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Free Cash Flow to Equity

The cash that a company has on hand after all debt service and expenses have been paid and reinvestment has been made. The free cash flow to equity is calculated thusly:

FCFE = Net income + newly borrowed debt - capital expenditures - change in net working capital - debt service.

FCFE is a measure of a company's value and is considered an alternative to the dividend discount model.
References in periodicals archive ?
First, TO has a positive effect on FOE values, expressing that an increase in turnover -that is a decrease in the capital-intensive structure of assets- increases the FCFE value.
Financial margins CF, OCF, UFCF, and FCFE are considered explanatory variables in their values for years t and t-1, giving then another eight explanatory variables (CF and [CF.
Financial data analysis shows that sample firms often have difficulty in paying interest charges and in distributing dividends as expressed by UFCF and FCFE values, respectively, and this is true even in the case of positive profit.
Earnings Before Interest and Tax (EBIT) - Interests = Profit Before Tax (PBT) - Income tax = Net Income (NI) + Depreciation - Change in Non-Cash Net Working Capital + Acquired loan capital - Paid out loan capital4 - Capital Expenditure (CAPEX) = FCFE.
Thus, for the FCFF method we use Weight Average Cost of Capital (WACC), whereas for FCFE -cost of own equity.
However, the starting point for this proposed here method of calculating shares is the methodology of determining valuations by means of FCFF and FCFE methods (Damodaran, spreedsheets).
To check the correctness of the obtained results we can establish company value according to the FCFE method.
You can consider stock buybacks to be the return of excess cash accumulated largely as a consequence of not paying out their FCFE as dividends.
The FCFE model treats the stockholder in a publicly traded firm as the equivalent of the owner in a private business.
The constant growth FCFE model is designed to value firms that are growing at a stable rate and are hence in steady state.
Companies that are able to generate free cash flow (whether FCFE or FCFF) are often viewed as attractive takeover candidates.
Where FCFE is free cash flow to equity for the last year.