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How to forecast Free Cash Flow to Firm (FCFF)? Describe the process.

How to forecast Free Cash Flow to Firm (FCFF)? Describe the process.

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Answer #1

Free Cash Flow to Firm (FCFF) is a surplus cash flow available to a firm. It is also known as unleveraged free cash flow i.e. it is a debt free fund. It is a fund available to all fund providers like debt holders, debentureholders, stock holders etc.

Following is the process of forecasting the FCFF:

  1. Firstly, we multiply the Earning Before Interest and Tax (EBIT) by (1-tax rate) to arrive at Net Operating Profit After Tax (NOPAT).
  2. Secondly we add depreciation and amortization to NOPAT .
  3. Thirdly, we deduct the Capital Expenditure from NOPAT
  4. Lastly, we deduct the changes to Net Working Capital from NOPAT.

The formula for free cash flow of firm is:

FCFF= NOPAT + Depreciation or amortization - Capital Expenditure - changes to Net Working Capital.

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