1. Submitted By:
Rajagiri Centre
For Business
Studies

2. Objective
 To arrive at best possible cash flow using Free Cash
Flow to Firm, Free Cash Flow to Equity, and Capital
Cash Flow
 Measurement of cost of capital.
 Valuation of a project.

3. FCFF vs. FCFE Approaches to
Equity Valuation
Equity Value
FCFE Discounted
at Required
Equity Return
FCFF Discounted
at WACC – Debt
Value

4. FREE CASH FLOW TO FIRM (FCFF)
Measure of financial performance that expresses the net
amount of cash that is generated for the
firm, consisting of expenses, taxes and changes in net
working capital and investments.
FCFF = Operating Cash Flow- Expenses- Taxes- Changes
to NWC- Changes in Investments

5. VALUATION USING FCFF
Year
0
1
2
3
4
5
FCFF
250.00
310.00
rwacc
Value of
Project
11.66%
11.68%
4639.53
4871.50
1700.00
1785.00
2939.53
3086.50
3458.09
Debt
Value of
Equity
rw acc, year 5
E year 4
E year 4
D year 4
re, year 5
D year 4
D year 4
D year 4
rdebt
1 Tc

6. FREE CASH FLOW TO EQUITY(FCFE)
Shows how much cash can be paid to the equity
shareholders of the company after all
expenses, reinvestment and debt repayment.
FCFE= Net Income- Net Capital Expenditure- Change in
Working Capital + New Debt- Debt Repayment

7. VALUATION USING FCFE
Year
0
2
3
4
5
78.00
135.90
193.80
251.70
309.60
16.38%
16.34%
2730.00
2866.5
1700.00
FCFE
1
1785.00
4430.00
4651.50
re
Value of
Equity
Debt
Value of
Project
re , yea r 5
3286.92
ru n levered
D yea r 4
E yea r 4
1
Tc
ru n levered
rd eb t

8. CAPITAL CASH FLOW (CCF)
 Movement of money for the purpose of investment,
trade or business production.
 Occurs within corporations in the form of investment
capital and capital spending on operations and
research & development.
 Measure the cash flows accruing to both equity
holders and bond holders.
 CCF = Free cash flow to equity + Cash Flow to Debt
holders

9. VALUATION USING CCF
Year
0
1
2
3
4
5
282.20
343.60
12.75%
12.76%
4430.00
4651.50
Debt
1700.00
1785.00
Value of
Equity
2730.00
2866.50
CCF
rccf
Value of
Project
rccf
3286.92
E
E
D
re
D
E
D
rdebt

10. FCFF Using E r D r
WACC
rwacc(modified)
Year
mv e
Emv
0
FCFF
1
Dbv .ractual .T
Dmv
2
3
4
5
70.00 130.00 190.00 250.00 310.00
rwacc, modified
Value of Project
mv debt
11.98% 12.00%
3286.92
4430.00 4651.50
Debt
1700.00 1785.00
Value of Equity
2730.00 2866.50

11. VALUATION USING FCFF - WACC
 NPV is showing positive value in FCFF using WACC.
 Firms in practice set their target capital structure in
terms of book values.
 The book value information can be easily derived from
the published sources.
 The book value debt-equity ratios are analyzed by
investors to evaluate the risk of the firms in practice.

12. SUMMARY
FCFF vs. FCFE
• FCFF = Cash flow available to all firm capital providers
• FCFE = Cash flow available to common equityholders
• FCFF is preferred when FCFE is negative or when capital
structure is unstable
Equity Valuation with FCFF & FCFE
• Discount FCFF with WACC
• Discount FCFE with required return on equity
• Equity value = PV(FCFF) – Debt value or PV(FCFE)

13. RECOMMENDATION
 NPV is positive, so its better to select FCFF using
WACC.
 Calculated using estimated forecasted value.
 We suggest FCFF using WACC method is appropriate
for Somesh Katre’s Business Plan.