Factors that affect FCFE & FCFF

CFA Level II
#1

Hi,

Can anyone easily explain what factors affect FCFE and FCFF. Say bond issuances, stock repurchases, etc. I am trying to better understand the flow throughs and what impacts what.

Cheers,

Rex

#2

New debt emission (bond issuance) or debt repayment affect FCFE not FCFF given the fundamental formula.

Stock repurchases might not significantly affect FCFE nor FCFF.

#3

The factors that affect both can be deduced from their formulae (e.g. net income, NCC, FCinv, WCinv, Interest expense etc). I assume you know these.

To get from FCFF to FCFE always deduct int(1-t) and add back net borrowing.

Bond isuance is categorized as under net borrowing, so it affects only FCFE. Stock repurachses, buybacks etc are uses of cash flow, so these do not affect either. In other words they are not in the formula.

#4

Hey guys just wanted to clarify debt repayment affect fcfe because of net borrowings ie amt borrowed-amt repayed?and fcff and fcfe are not affected by dividens or stock repurchase because that is something done after you are left with free cash flow am i correct?

#5

FCFF = NI+NCC+I(1-t)-FCInv-WCInv

FCFE= NI + NCC - FCInv-WCInv + NB (or FCFF -I(1-t)+NB))

NB = New debt issues (cash inflow) - current debt emission repurchase (repayment) (cash outflow)

Thus NB affect only cash flow to equity holders, FCFE.

Dividend and share repurchase does not cause any change in both equations above since NI is not affected.

#6

Thank you Flashback!

#7

Is FCFF always equal to or greater than FCFE?