Free Cash flow is the general term which describes the cash that is available for distribution after the company has made all fixed and working capital investments. There are two kinds of free cash flow:
FCFF: After the necessary investments have been made, this the left over cash available for all providers of capital (debt and equity holders)
FCFF = NI + Dep + Int (1 - Tax) - WCInv - FCInv
FCFE: Once the debt holders have been paid off with the FCFF, the remainder is FCFE which available for distribution to equity holders.
Free Cash flow is the general term which describes the cash that is available for distribution after the company has made all fixed and working capital investments. There are two kinds of free cash flow:
FCFF: After the necessary investments have been made, this the left over cash available for all providers of capital (debt and equity holders)
FCFF = NI + Dep + Int (1 - Tax) - WCInv - FCInv
FCFE: Once the debt holders have been paid off with the FCFF, the remainder is FCFE which available for distribution to equity holders.
FCFE = FCFF - Int (1 - Tax) + Net Borrowing
I want to understand the reasoning for some formulae so that I could memorize them better. To reconcile 2 formulae for FCFF, I have come up with:
(1) FCFF= NI+ Interest expense x (1- tax rate)+ Dep- FCInv- WCInv
(2) FCFF= EBIT x (1- tax rate)+ Dep- FCInv- WCInv
= (EBT+Interest expense) x (1- tax rate)+ Dep- FCInv- WCInv
= EBT x (1-tax rate)+ Interest expense x (1- tax rate) + Dep- FCInv- WCInv
= NI + Interest expense x (1- tax rate)+ Dep- FCInv- WCInv
Hope that this helps.