Why is it that Proceeds from issuing new common shares, and repurchases of shares have no effect on FCFF and FCFE?
FCFF = NI + Dep + Int(1-t) - FInv - WInv FCFE = NI + Dep - FInv - WInv + Net borrowing If you issue new shares or repurchase shares non of the above RHS figures change.
Thanks. I understand and know the formulas. I’m looking for a more logical explanation however? If someone gives me $100, and I issue them a piece of paper that declares some % ownership, it would seem that would give me an extra $100 of free cash?
Proceeds from issuing new common shares are available to equity and debt providers of the firm. Repurchase of shares is a use of free cash flow available to equity. FCFE calculates the cash flow available to equity providers of the firm. That’s why no effect. For eg: Interest is not available to equity providers and that’s why is deducted from FCFE.