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 ?

Practitioners have long used variants of free cash flow to equity to judge the attractiveness of companies as investments.

Since the free cash flow to equity measures the same for a publicly traded firm, we are assuming that stockholders are entitled to these cash flows, even if managers do not choose to pay them out.

In reality, the growth rate in FCFE should be different from the growth rate in dividends, because the free cash flow to equity is assumed to be paid out to stockholders.

2 Discounted cash flow valuation

One of the most frequently used discounted cash flow models is based on free cash flow to equity rather than dividends.

1] represents next year's forecast of free cash flow to equity.

Chapter 35 Security valuation

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