1. What is Free Cash Flow to Equity (FCFE)?

FCFE represents the cash flow available to equity shareholders after all expenses, reinvestments, and debt obligations. It's a key metric for determining how much cash can be distributed to shareholders without harming the company's operations.

2. How Does the Calculator Work?

The calculator uses the FCFE formula:

Where:

• \( Net\ Income \) — Company's net profit
• \( Capex \) — Capital expenditures for maintaining/growing assets
• \( Depreciation \) — Non-cash expense for asset wear and tear
• \( \Delta Working\ Capital \) — Change in current assets minus current liabilities
• \( Net\ Borrowing \) — New debt issued minus debt repayments

Explanation: The formula adjusts net income for cash flows related to investments and financing activities to determine actual cash available to equity holders.

3. Importance of FCFE Calculation

Details: FCFE is crucial for dividend policy decisions, stock valuation (using DCF models), and assessing a company's financial health. Positive FCFE indicates capacity to pay dividends or repurchase shares.

4. Using the Calculator

Tips: Enter all amounts in the same currency unit. For ΔWorking Capital, use positive values for increases in working capital (cash outflow) and negative for decreases (cash inflow).

5. Frequently Asked Questions (FAQ)

Q1: How is FCFE different from FCFF?
A: FCFF (Free Cash Flow to Firm) is available to all investors (debt and equity), while FCFE is specifically for equity shareholders after debt obligations.

Q2: What does negative FCFE mean?
A: Negative FCFE suggests the company is investing heavily or paying down debt, leaving no cash for equity holders. This isn't necessarily bad if investments generate future returns.

Q3: When is FCFE most useful?
A: FCFE is particularly valuable for companies with stable capital structures and for dividend-paying firms where payout ratios are based on FCFE.

Q4: How does depreciation affect FCFE?
A: Depreciation is added back because it's a non-cash expense that reduced net income but didn't actually consume cash.

Q5: Why include net borrowing in FCFE?
A: Debt financing provides additional cash that could be distributed to shareholders, hence it increases FCFE.