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Free Cash Flow to Equity FCFE (Formula, Examples) | Calculation - YouTube
Channel: WallStreetMojo
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hello everyone hi welcome to the channel
of Wallstreetmojo friends forever
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we're going to learn a concept that is FCFE that is free cash flow from the
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firm equity calculation of the free
cash flow to equity you know we'll be
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learning some of the formula an example
let's begin now free cash flow to the
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equity model is one of the discounted
DCF approaches okay
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along with the FCFF to calculate the fair
price of the stock
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now FCFE measure you know how much the cash a firm can return to its
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shareholders and is calculated after
taking care of the taxes the CAPEX can
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save and the debt cash flows
okay now in addition in addition that FCFE
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model is very similar to DDM or
the dividend discount model which
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directly calculates the equity value of
the firm unfortunately FCFE model and
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FCFE model has various limitations like
dividend discount model for example it
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is useful only in cases where the
companies leverage is not more volatile
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in in nature and it cannot be applied to
the companies with changing that
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leverage now FCFE formula goes
something like this
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FCFE is equal to your net income
you need to add something over here as
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depreciation plus any changes in the in the working
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capital and then post you need to add any net
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borrowings or the net debt once you do
that you have your answer
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the 1st that we are going to discuss
is the net income see net income is after
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the payment of the interest in expense
okay
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net income can be taken directly from
the income statement you can also find
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this in the cash flow statement cash
flow from the operation in the CFO is
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repaired using the indirect method the
2nd thing you need to add back any
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depreciation so add any depreciation and
amortization now when we are talking
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about this amortization head is is not
given separately of this expenses and
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gets included in the SGNA you can find
depreciation and amortization from the
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cash flow from the operations the 3rd
thing that you need to do is plus or
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minus you can say
we need to add or less any changes in
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the working capital okay so you need to
note something that in cash can be
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either outflow or inflow working capital
primarily includes inventory receivables
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payables and you may also include
accrued liabilities in this in this
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formula short-term debt is not included
here in in the changes in the working
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capital now the 4th is you will
deduct something that is called CAPEX
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CAPEX over here see critically to
critical to determine the CAPEX level
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requires to support sales and margins to
focus this numbers can be most easily be
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located from the cash flow from the
investments you need to note that not
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only the capital expenditures taken we
must also include the addition to the
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intangible assets intangible becomes
important for software knowledge based
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businesses 5th what you need to do you
need to just add or deduct that is add
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or less any net borrowings of the net
debt talking about this like working
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capital this number can also be in out
flow in flow this includes both the
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short term as well as the long term debt
and be sure to include the net figures
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that is debt issues - the debt prepaid
so your FCFE formula goes something
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like this is equal to EBIT EBIT - your
interest okay interest less taxes from
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this and you will add any depreciation
plus amortization and changes in the
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working capital you will add something that is called
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CAPEX plus any net debt that is net
borings right and FCFF can also be
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calculated as the this can be also be
calculated as the FCFF less any
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interest into 1 - tax okay add you
we need to add the net borrowings from
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this this is how the formula has been
calculated now that we know that you
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know FCFF is a formula we can start with
the calculate the FCFE for 2016 you can
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see the balance sheet liability an
income statement over here based on this
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will try solving the net income FCFE
formula which we know where you
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will know it because we have understood
find the net income which is over here
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$168 right find the depreciation and
amortization which is the second portion
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so that is 150 over here and then the
third thing that changes in the working
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capital so you need to do some
calculation based on the changes in the
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working capital cash account receivable
inventory current assets and all of the
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assets 817 630 and same for the
liabilities once you do the changes
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in the working capital you get your
capital expenditures your capital
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expenditure is basically change in the
gross PPE which is your data over here
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gross PPE 1200 - 900 and you went once
you do that you get your capital
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expenditure you need to note that the
cash impact will be outflow of 300 as
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you can as you can see that 2016 is
1200 and 17 is 1200
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and 16 is 900 that means there is an outflow which has been
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done the net borrowings they short term
long term borrowings as you can see in
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over here short term and long term
borrowings short term debt and long term debt
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so the differences will be 60 - 30 so 30
borrowing will include the and the long
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term debt is 342 - 300 - so the net
boring is going to be 30 + 42 and
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when we have all the data you just put
in the formula you get your FCFE and
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your FCFE seems to be positive over
here which is 15 this is how you
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calculate your data for FCFE formula
remember one thing you know there are
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many other ways also to calculate your f
CFE and for calculating for discounting
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but this is the best possible fashion
you can put things into now what exactly
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you need to learn is what exactly is
your negative FCFE see like net income
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FCFE can also be negative and negative
FCFE can happen due to any or
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combination of the factors like you know
company is reporting huge losses
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net income is largely negative over here
second you can say that company makes
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huge capex for the huge capital
expenditure resulting in negative FCFE
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you can say that changes in the the
3rd reason can be changes in the
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working capital or resulting in an
outflow right
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and the 4th thing is that debt is
repaid it is repaid resulting in large
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cash flow so this can be the reason and
behind which the cash flows the FCFF
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can be negative now how divided is
different from FCFE see you can think of
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FCFE as the potential dividend can
think it does that way instead of actual
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dividend a part of the earning each year
may be paid to the shareholders dividend
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payout and remaining amount is written
by the company for the future growth
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so dividend depends on the dividend
payout ratio and mature and stable
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companies do try to follow this stable
dividend policy but FCFE is
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basically the free cash flow available
after all the obligations have been
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taken care of think of the CAPEX debt
walking capital extra second FCFE
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starts with a net income you can say
before the dividends are deducted and
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add all the non-cash items like
depreciation and amortization thereafter
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what you need to do is that capital
expenditure required for the company's
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growth is subtracted in addition changes
in the working capital is also accounted
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so as to we successfully run the
business in operating year lastly the
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net borrowings can be negative or positive as added FCFF is therefore is the
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potential dividend dividends left over after all
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these stakeholders have been taken care
of thank you everyone
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