FCFF and FCFE

CFA Level II
#1

Any tips on how to memorize different permutations to derive FCFF and FCFE from net income, EBIT, EBITDA etc?

It is theoretically posible to derive the equations, but i suppose there isnt sufficient time to do so in the actual exam?

Thanks for all inputs

#2

I always use the following rule:

  1. FCFF : This is the cash flow to the firm, hence I start with after tax operating income ( this is the earning available to the firm) , add back depreciation, subtract change in non cash WC, capex

  2. FCFE : As its cash flow to the equity investors, I start with Net income ( earning after paying interest expense) , add back depreciation and so on.

Now you can play with it and calculate FCFF or FCFE with whatever data given whether its Ebitda or ebit or net income

Hope this helps

#3

If you cannot memorize them, then you will need to derivate them. Derivate them could be easy if you know how an income statement works and to practice the math behind it (the tax shield effect distort everything). My plan is to practice and take the time it deserves…

… they will be tested, so there is a certain reward on working on it :wink: