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101 Concepts for the Level I Exam

Essential Concept 52: Calculating FCFF and FCFE


FCFF

FCFF from NI: FCFF = NI + NCC + Int (1 – tax rate) – FCInv – WCInv

FCFF from EBIT: FCFF = EBIT (1 – Tax rate) + Dep – FCInv – WCInv

FCFF from EBITDA: FCFF = EBITDA (1 – Tax rate) + Dep (Tax rate) – FCInv – WCInv

FCFF from CFO: FCFF = CFO + Int (1 – Tax rate) – FCInv

 

FCFE

FCFE from FCFF: FCFE = FCFF – Int (1 – Tax rate) + Net Borrowing

FCFE from NI: FCFE = NI + NCC – FCInv – WCInv + Net borrowing

FCFE from CFO: FCFE = CFO – FCInv + Net borrowing

To determine the WCInv, we ignore cash and short-term debt. For example, if we are given the following information about a company:

Y1 Y2
Cash 10 12
AR 20 22
Inv 30 33
AP 10 10
Short-term debt 14 17

 

WCInv = (22 + 33 – 10) – (20 + 30 – 10) = 5