I am new here and hope you can help clear some confusion that relates to my work. I am very confused with the way FCFF and FCFE are calculated. Two specific questions:
CAPEX: When I look at the BS, I can see the PPE and other items (below)
Total current assets 291 438 518 649 768 Property, plant & equipment, net 1,929 2,811 3,589 4,505 4,882 Goodwill, net 400 516 557 798 883 Intangibles, net 46 93 84 174 206 Long term investments – -- – -- – Note receivable - long term – -- – -- – Other long term assets – -- – -- – Total assets 2,672 3,861 4,749 6,126 6,743
Then, when looking at CF statement, this shows Capex:
INVESTING Capital expenditures -85 -79 -110 -113 -141 Other investing and cash flow items, total -92 -234 -60 -414 -350 Total cash from investing -177 -313 -170 -527 -491
I don’t really understand how it is calculated because if we look at change in PPE each year, it should be much higher than reported on CF.
FCFE vs FCFF:
The company used excessive debts in the past so I assume this pattern continues into the 5 year future. This means new debts are issued every year. Obviously, because of this, the FCFE would be much higher than FCFF, resulting in different outcomes of equity valuation. I wonder: if FCFF is supposed to be available to the firm i.e. all stakeholders, why New Debts are not included in it?
Yes, of course I consider other elements of cash flow already. I just don’t understand why if I take the difference between PPE each year then it is massively different with Capex as shown in the Cash Flow Statement.
FCFF is unlevered free cash flows i.e. before the effect of debt and that is why after tax interest is added back to NI without taking consideration of debt repayments and borrowings. If you analyze the formula of FCFF you will realize that when we say cash flows available to all stakeholders, we meant cash flow from operations net of capex (CFI) necessary to increase or sustain operating cash flows . However effect of financing cash flows (debt) comes under FCFE and that is why it is also called Levered Free Cash Flows because you cannot pay dividends to Common stock holders unless you make mandatory debt repayments.
Search an article in google: “FCFF - An analytical modification” for more clarity.