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.
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.
Such statements may include but are not necessarily limited to the following: that the projected revenue, earnings per share and
free cash flow to equity will be within the estimated ranges for fiscal year 2009.
Fitch also expects that cable MSOs will continue to return nearly all of their
free cash flow to equity shareholders in 2008, primarily through share repurchases.
Free Cash Flow to Equity is defined as cash flow from operating activities plus or minus cash flow from investing activities (excluding net cash paid for acquisitions), less required payments of debt (total debt payments excluding payments on the line of credit).
The valuation call is based solely upon discounted
free cash flow to equity analysis.
