FCFE =

FCFE =

FCFE=

Value of Equity
Value per share

FCFF=

FCFF=

FCFF=

Firm value
Value of Equity
Value per share

Find the FCFF and FCFE from NI

Net Income or Profit
Depreciation expense
Interest expense
Tax rate
Purchases of fixed assets
Investment in working capital
Net borrowing
Equity dividends
FCFF = NI + Int (1 – Tax rate) + Dep – Cap Exp - WCInv

FCFF = 315 + 150(1 - 0.3) + 400 – 500 – 50

= 270

FCFE from Net Income

FCFE =NI + Dep - Cap Exp – WCInv + Net Borrowing
= 315 + 400 - 500 – 50 + 80
=245
Net Income + net non cash charges - investment in fixed capital - Investment in non cash working capital + net borrowing

Net Income - (Capex -Dep) - (Change in non cash working capital) + (New Debt raised - Debt repayment)

Net Income- (Capital Expenditures - Depreciation)(1 - d) - (change in Working Capital)(1-d)

where 'd' is debt financing which is the proportion of debt financing for investments in fixed or WC

= FCFEs discounted at cost of equity

=Value of equity/no. of outstanding shares

Net Income + net non cash charges + interest expense(1-tax rate) - investment in fixed capial - Investment in non cash working

EBIT (1- TAX RATE) - (CAPEX - DEP) -Change in WC

Net Income + Depreciation - Capital Expenditures - Change inWorking Capital + Interest Expenses (1 - tax rate)

= FCFFs discounted at WACC

= Firm value - Market value of debt
=Value of equity/no. of outstanding shares

Rs 315 cr
Rs 400 cr
Rs 150 cr
30%
Rs 500 cr
Rs 50 cr
Rs 80 cr
Rs 200 cr
x rate) + Dep – Cap Exp - WCInv

0.3) + 400 – 500 – 50

e
Exp – WCInv + Net Borrowing
+ 80
Free Cash Flow to the Firm (FCFF): What cash is available before any financing considerations

FCFF is the cash flow available to the company’s suppliers of capital after all operating expenses (including tax
been paid and necessary investments in working capital (e.g., inventory) and fixed capital (e.g., equipment) ha
made.

Free Cash Flow to Equity (FCFE): What could shareholders be paid

FCFE is the cash flow available to the company’s equity shareholders after all operating expenses, interest, and
principal payments have been made and necessary investments in working and fixed capital have been made
 iderations

ting expenses (including taxes) have

apital (e.g., equipment) have been

ting expenses, interest, and

d capital have been made
Vishal needs to prepare a valuation of Sindhu Enterprises. It is the first day of 2021
He has assembled the following information:
EPS for 2020(Rs) 3.12
Estimates of growth rate of EPS is given. After 2024, EPS will grow at 7% annually
Year 2021 2022 2023 2024
Growth rate for EPS 18% 12% 9% 8%

Estimates of net Investment in Fixed Capital or Capex (net of Depreciation) is given. After 2024, capex is expected to grow at 7
Year 2021 2022 2023 2024
Net Capex per share 2.5 2 1.5 1
The net investment in working capital each year will be 50% of net capex
30% of the net investment in capex and WC will be financed by debt financing
Current market conditions dictate a risk free rate of 6%, market risk premium of 4% and a beta of 1.1 for Sindhu
What is the per share value of Sindhu on the first day of 2021, if the FCFE is expected to grow at 7% annually after 2024?
Solution:
Debt Ratio 0.3

Year 2020 2021 2022 2023 2024 2025

Growth rate of EPS 18% 12% 9% 8% 7%
EPS 3.12 3.68 4.12 4.49 4.85 5.19
Net Capex per share 2.5 2 1.5 1 1.07
WC inv per share 1.250 1.000 0.750 0.500 0.535
Debt financing per share 1.13 0.90 0.68 0.45 0.48
FCFE per share 1.06 2.02 2.92 3.80 4.07
Terminal value of FCFE 119.72
FCFE + TV 1.057 2.023 2.919 123.520
Value per share today $87.94
pex is expected to grow at 7% annually

1.1 for Sindhu

% annually after 2024?

Required rate of return for Sindhu

Rf 6%
MRP 4%
Beta 1.1
ke 10.4%

FCFE= Net Income-

where 'd' (Capital Expenditures - Depreciation)(1 - d) - (change in Working Capital)(1-d)
debt financing
You are told to create a model for valuation of equity shares using FCFF with the help a 3 stage growth model
Use the information of Marathon Oil Company as an example
You have accumulated the following information about the company to use in the model

The user should put the following information in the yellow zone
Current FCFF 745 million
Outstanding shares 309.39 million
Equity Beta 0.9
Rf 5.04%
Market Risk Premium 5.50%
Cost of debt 7.10%
Tax rate 34%
Capital structure Debt 20% Equity 80%
Long Term Debt 1518 million
Year 0 1 2 3
Growth rate of FCFF 8.80% 8.80% 8.80%

Estimate:
WACC
Value of the firm
Value of equity
Value per share
WACC WT Cost
Debt
Equity

0 1 2 3
Growth rate of FCFF 8.80% 8.80% 8.80%
FCFF
TV
FCFF+TV
Value of firm
Value of equity
Value of equity per share
growth model

4 5 6 7 8
8.80% 7.40% 6% 4.60% 3.20% thereafter

4 5 6 7 8
8.80% 7.40% 6% 4.60% 3.20%