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Briefly explain adjustments to free cash flow to the firm (FCF) when computing free Cash flow...

Briefly explain adjustments to free cash flow to the firm (FCF) when computing free Cash flow to Equity (FCE)

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Answer #1

Free cash flow to equity=Free cash flow to the firm - Interest expense×(1?Tax rate)+ Net borrowing

To find FCFE, therefore, we must reduce FCFF by the after-tax value of interest paid to debtholders and add net borrowing (which is debt issued less debt repaid over the period for which one is calculating free cash flow)

The cash flows (net of taxes) that arise from transactions with creditors and preferred stockholders are deducted from FCFF to arrive at FCFE. FCFE is the amount that the company can afford to pay out as dividends.

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