Free Cash Flow Valuation

FCFF vs. FCFE Definitions

FCFF: Free Cash Flows to the Firm are available to both suppliers of equity and debt capital; return of these cash flows to stock and bond investors does not threaten the company’s existence as a going concern.

WACC & FCFF: When performing a company valuation using discounted FCFFs, the discount rate applied should be the weighted average cost of capital (based on the target capital structure), to reflect both the cost of equity and cost of debt.

Value0 = Σ  FCFFt / (1+WACC)t

Equity Value = Calculated Firm Value – Market Value of Debt

This can be converted to a share price by dividing the Equity Value by the number of shares outstanding.

FCFE: Free Cash Flows to Equity are available to stock holders only; return of these cash flows to stock investors does not threaten the company’s existence as a going concern.

Value0 = Σ  FCFEt / (1 + rce)t

The equity value derived from an FCFE analysis can then be divided by the number of shares outstanding to arrive at a share price.

This content is for paid members only.

Join our membership for lifelong unlimited access to all our data science learning content and resources.