Free Cash Flow (FCF)
Free cash flow (FCF) is the amount of cash that a company has left over after it has paid all of its expenses, including net capital expenditures. Net capital expenditures are what a company needs to spend annually to acquire or upgrade physical assets such as buildings and machinery to keep operating.
Formula 6.12
| Free cash flow = cash flow from operating activities - net capital expenditures (total capital expenditure - after-tax proceeds from sale of assets) |
The FCF measure gives investors an idea of a company's ability to pay down debt, increase savings and increase shareholder value, and FCF is used for valuation purposes.
Free Cash Flow to the Firm (FCFF)
Free cash flow to the firm is the cash available to all investors, both equity and debt holders. It can be calculated using Net Income or Cash Flow from Operations (CFO).
The calculation of FCFF using CFO is similar to the calculation of FCF. Because FCFF is the cash flow allocated to all investors including debt holders, the interest expense which is cash available to debt holders must be added back. The amount of interest expense that is available is the after-tax portion, which is shown as the interest expense multiplied by 1-tax rate [Int x (1-tax rate)]. .
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