5. Project valuation through FCFE

The Free Cash Flow Equity (FCFE) can be used as an alternative to the Free Cash Flow to the Firm (FCFF). The FCFE refers only to the cash flows which can be made available to equity holders, that resulting in a direct of the equity value.

The FCFE and the FCFF

It is possible to calculate the FCFE from FCFF. Considering that the FCFF is available to the holders of capital, to calculate the FCFE it is necessary deduct the part of the FCFF to be directed to debt holders. Remember, debt has a higher credit hierarchy than equity, hence only after the debt responsabilities are fully paid can any cash flow that is left be directed to the equity holders (you will not have cash to pay dividends if the debt service consumes all FCFF).

The FCFF attributable to debt regards the payment of interests (deducted of the effect of the tax shield) and the variation of financial debt.

  • \(FCFE=FCFF-Interest\left(1-t\right)+∆Debt\)


  • \(FCFE=FCFF-Interest\ cost+∆Debt\)

To compute the FCFE

If you can calculate the FCFE starting at the FCFF, it is logical that is also possible to do so from the EBIT, EBITDA and net income.

Calculating the FCFE from the EBIT

Using the EBIT as the basis to calculate the FCFE is similar to the FCFF, only differing in the debt related cash flows.

  • \(FCFE=EBIT\left(1-t\right)+NCC-\mathrm{\Delta WCI}-Inv-I\left(1-t\right)+∆D\)


  • EBIT: earnings before financing costs and taxes.
  • t: the collective income tax.
  • NCC: net non-cash charges.
  • Δ WCI: variations of the working capital requirement.
  • Inv: investment in fixed assets.
Calculating the FCFE from the EBITDA

The calculation of FCFE assuming EBITDA is similar to the approach through the EBIT:

  • \(FCFE=EBITDA\left(1-t\right)+\left(NCC\right)\left(t\right)-\mathrm{\Delta WCI}-Inv-I\left(1-t\right)+∆D\)
Calculating the FCFE from the Net income

The FCFE can also be obtained through the net income.

  • \(FCFE=NI+NCC-\mathrm{\Delta WCI}-Inv+∆D\)