Asked Mar 23, 2019

How do you calculate free cash flow?


Expert Answer

Step 1

A free cash flow is the cash flow free from any kind of claim from the stakeholders above you in the pecking order. There are two types of free cash flows:

  1. Free cash flow to the firm (FCFF)
  2. Free cash flow to the equity holder (FCFE)
Step 2

FCFF = Free cash flow generated from the operations left after taking care of capital expenditure needs of the firm.

It's calculated by the folowing formula: FCFF = Cash flow from operations - Capital expenditure

Cash flow from operations = EBIT x (1 - Tax rate, T) + Non cash expenses - increase in working capital

Non cash expenses are usually = Depreciation + Amortization + Impairment + Deferred taxes

Hence, FCFF = Cash flow from operations - Capital expenditure = EBIT x (1 - T) + Depreciation + Amortization + Impairment + Deferred taxes - increase in working capital - Capital expenditure

Step 3

FCFE = Free cash flow after debt requirements are met and capital expenditure requirement is taken care of = PAT+  Depreciation + Amortization + Impairment + Deferred taxes - increase in wor...

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