Free Cash Flow to the Firm (FCFF) v/s Free Cash Flow to Equity(FCFE)

-

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
Expected 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)
100.00
120.00
144.00
172.80
207.36
248.83
261.27
Taxes
48.00
57.60
69.12
82.94
99.53
104.51
EBIT(1-t)
72.00
86.40
103.68
124.42
149.30
156.76
- Reinvestment
48.00
57.60
69.12
82.94
99.53
78.38
FCFF(Free cash flow to the firm)
24.00
28.80
34.56
41.47
49.77
78.38
Terminal Value
970.08
Present Value
21.22
22.52
23.90
25.36
551.57








Value of Firm =
644.59
704.90
768.30
834.23
901.88
970.08
Value of Equity =
515.67





Value of Debt =
128.92





EBIT( Earnings before interest & tax)
100.00
120.00
144.00
172.80
207.36
248.83
261.27
Interest Exp
11.60
12.69
13.83
15.02
16.23
17.46
EBT( Earning before tax)
108.40
131.31
158.97
192.34
232.60
243.81
Taxes
43.36
52.52
63.59
76.94
93.04
97.52
Net Income (PAT)
65.04
78.79
95.38
115.41
139.56
146.29
- Reinvestment
48.00
57.60
69.12
82.94
99.53
78.38
+ New Debt Issued
12.06
12.68
13.19
13.53
13.64
9.70
FCFE (Free cash flow to equity)
29.10
33.87
39.45
45.99
53.67
77.61
Terminal Value of Equity
776.06
Present Value
25.31
25.61
25.94
26.30
412.52
Value of Equity =
515.67
Capital Structure






Debt at end of year
128.92
140.98
153.66
166.85
180.38
194.02
203.72








Cost of Equity
15%
15%
15%
15%
15%
15%
Pre-tax Cost of Debt
9%
9%
9%
9%
9%
9%
After-tax Cost of Debt
5.40%
5.40%
5.40%
5.40%
5.40%
5.40%
Cost of Capital*
13.080%
13.080%
13.080%
13.080%
13.080%
13.080%
*(computed using a 70% equity,30% debt ratio), cost of debt + cost of equity



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