Mona Swarnakar

FCFF :- A measure of financial performance that expresses the net amount of cash that is generated for the firm, consisting of expenses, taxes and changes in net working capital and investments. FCFF= Operating cash flow-expenses-taxes-changes in NWC (net working capital)- changes in investments FCFE :- How much cash can be paid to the equity shareholders of the company after all expenses, reinvestment and debt repayment. FCFE = Net Income - Net Capital Expenditure - Change in Net Working Capital + New Debt - Debt Repayment

Shows both the Free Cash Flow to Firm (FCFF) and Equity components of the valuation of an enterprise. Free Cash Flow to the Firm v/s Free Cash Flow to Equity Inputs Earnings before interest and taxes (EBIT) = 100 E xpected growth for next 5 years = 20% Expected growth after year 5 = 5% Tax rate = 40% Debt ratio for the firm = 20% Cost of equity = 15% Pre-tax cost of debt = 9% Return on capital in high growth= 15% Return on capital in stable growth = 10% 0 1 2 3 4 5 Terminal Year Expected Growth rate 10% 10% 10% 10% 10% 5% Reinvestment rate 66.67% 66.67% 66.67% 66.67% 66.67% 50.00% EBIT(Earnings before interest & tax)