Free Cash Flow Key Components, Formulas and How to Calculate?

  1. Financial Modelling
    1. Financial Modelling Introduction
    2. Financial Modelling Tools & steps
    3. How to Make a Financial Model and choose the best Company and Excel Workbook Setup?
    4. How to build a financial model Step-by-Step Guide to Excel Sheet Setup?
    5. Financial Statements: A Step-by-Step Guide to Extracting Historical Data
    6. Financial modelling excel
    7. Learn financial modelling Balance Sheets, P&L, and Assumptions Know About
    8. What is financial modelling Assumptions and Projections?
    9. Financial modelling and valuation
    10. Investment decision calculation
    11. The balance sheet’s asset side reveals the company’s line items.
    12. Revenue Model & Growth Rate in in P&L Assumptions
    13. Basics of financial modelling CAPEX and Asset Schedule
    14. Financial Analysis: Gross Block and CAPEX
    15. Gross block & Capex: Constructing the Asset Schedule
    16. Depreciation : Connecting P&L and Balance Sheet for Accurate Asset Forecasting
    17. depreciation expense : Exploring Different Methods in Financial Modeling
    18. Debt Management: Connecting P&L and Balance Sheet for Accurate Liability Projection
    19. Interest Rate Calculation & Debt Schedule
    20. Share Capital & Reserves
    21. IPOs and Under subscription : Bata’s Share Capital Dynamics
    22. Reserves & Surplus understanding Bata schedule
    23. Reserves and surplus schedule How to Build on Excel
    24. Financial modelling projections
    25. Balance Sheet Projections and Completing Reserves Schedule
    26. Cash Flow Statements Analysing Operations, Investments, and Financing Activities
    27. What Is Valuation for Investor
    28. Free Cash Flow Key Components, Formulas and How to Calculate?
    29. FCFF and FCFE uses in Mastering Free Cash Flow Calculation
    30. WACC Weighted Average Cost of Capital Analysis
    31. Market Risk Premium analysis
    32. Tax Shield and its Impact on Equity Holder Returns
    33. Weighted Average Cost of Capital and Terminal Growth in Valuation
    34. Terminal Value Understanding Perpetual Cash Flow Projections in DCF Model
    35. Learn Financial Modelling
    36. Free Cash Flow to the Firm (FCFF) Calculation with examples
    37. Stock Valuation DCF Model & Stock Market Value
Marketopedia / Financial Modelling / Free Cash Flow Key Components, Formulas and How to Calculate?

Building blocks

Continuing from the last section, we analysed both relative and absolute valuation approaches. Three primary components are the basis of absolute valuations 

The cash flow

The timing of the cash flow

The rate at which the cash flow gets discounted

Let us explore the larger idea of cash flow within this chapter. Building on from the previous chapter and the following ones, we will focus on comprehending the theoretical side of valuation. Ultimately, upon grasping this concept sufficiently, we can construct a valuation model and incorporate it into our existing structure.

The term ‘Free Cashflow’ is used here to refer to the cash generated from a company’s operations. This gives it freedom to use the money as it sees fit. To answer the question of who it belongs to, you must consider the two sources of funding a company usually has: debt and equity.

The debt and equity holders together finance the assets of the company. Hence, the following equation represents a company –

Debt Holders + Equity holders = Assets of the company

The debt and equity holders are the primary financiers of company assets. The resulting cash flow from these assets is shared between them, proportionately. To get a better sense of the company’s value, we factor in cash flow timing and discount rate when assessing the worth of said cash flow.

Here it is important to remember that all of the available cash belongs to the firm. This money, termed ‘Free Cash Flow to the Firm’ (FCFF), will be further divided between debt and equity expenses. The portion allocated to equity is known as ‘Free Cash Flow to Equity’ (FCFE).


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