Free cash flow to the firm
Cash available to all capital providers after operating expenses, taxes and investment in fixed and working capital. Discounted at the WACC it values the whole firm; debt is then deducted to reach equity.
Where you will meet it
Free cash flow to the firm appears in 10 learning outcomes on the CFA syllabus. A few of them:
- Contrast what FCFF, FCFE, dividend and residual income models each need as inputs
“The free cash flow to firm model uses cash available to all capital providers at the weighted average cost of capital, giving firm value, from which debt is subtracted to reach equity.”
- Derive FCFF and FCFE, the free cash flows to the firm and to its shareholders, using the cash flow statement
“Free cash flow to the firm starts from operating cash flow, adds back after-tax interest expense because the measure is before payments to any capital provider, and subtracts capital expenditure.”
- Contrast valuing a business by the free cash flow available to equity (FCFE) with valuing it by its free cash flow to the whole firm (FCFF)
“Free cash flow to the firm is the cash available to all providers of capital, debt and equity, after operating costs, taxes and investment in fixed and working capital.”
- Explain which adjustments turn EBIT (pre-interest, pre-tax earnings), EBITDA, net income and operating cash flow (CFO) into FCFF and FCFE
“FCFF can be reached from several starting lines.”
See also
Practise it
Practise free cash flow to the firm until it is automatic: questions that explain every wrong option.
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