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Basic Question 3 of 4
Which of the following statements is (are) true with respect to valuing a company based on the cash flow that it generates?
II. FCFF is net of all operating expenses, but before deductions are made to maintain the operational efficiency of plant and equipment.
III. The withdraw of cash from the company, as estimated by FCFF, should not impede the growth of the company.
IV. Free cash flow to equity (FCFE) can never be greater than FCFF.
I. Free cash flow to the firm (FCFF) is that cash which is available to both the equity holders and the debt holders of the firm.
II. FCFF is net of all operating expenses, but before deductions are made to maintain the operational efficiency of plant and equipment.
III. The withdraw of cash from the company, as estimated by FCFF, should not impede the growth of the company.
IV. Free cash flow to equity (FCFE) can never be greater than FCFF.
User Contributed Comments 9
| User | Comment |
|---|---|
| JVAC | how FCFE can be > than FCFF?? |
| mimi01 | FCFE can be greater becos you are adding net borrowing to the figure. |
| HenryQ | FCFE=FCFF-(Int(1-t)-NB), so if Int(1-t) <NB, FCFE is larger than FCFF. It all depends how much you borrow from bondholders vs how much interest you pay to them for a certain period. |
| kodali | III is incorrect too if a firm withdraws all the FCFF then there is nothing to invest for growth. The capital investments made as part of FCFF is only to maintain the current capacity and not for growth. |
| chbourke | No kodali. FCFF is the cash AFTER capital investment and WC investment. The company can still grow even if all FCFF is withdrewn. |
| MattNYC | FCFF = NI - CAPEX FECF = NI - CAPEX - (Interest expense + Debt buyback) |
| rocyang | Thanks Kokali! III got me, although in reality I (and many others) prefer those companies which are rich in cash reserve. |
| johntan1979 | Yeah, thanks for making things clearer and clearer to me! You'll never learn much by reading and studying on your own. |
| quanttrader | FCFE can be greater than FCFF since FCFE is cash available to shareholders net of cash paid to and recvd from bondholders. If cash recvd from bondholders > paid, then FCFE > FCFF |
Thanks again for your wonderful site ... it definitely made the difference.
Craig Baugh
Learning Outcome Statements
compare the free cash flow to the firm (FCFF) and free cash flow to equity (FCFE) approaches to valuation;
explain the ownership perspective implicit in the FCFE approach;
CFA® 2025 Level II Curriculum, Volume 4, Module 22.