For questions like: Which valuation method is most suitable, FCFF, FCFE or something else, how do you choose between FCFE and FCFF?
FCFE is to value the equity capital providers share in a company, FCFF is to value the firm to all investors (both debt and equity capital providers). FCFF may be preferred to FCFE if, for instance, the firm’s capital structure is expected to change significantly in the future (i.e., taking on a lot more debt). Neither FCFE or FCFF valuation require that dividends be paid and they both assume a controlling interest in the company (as you’re implying with the cash flows that you have full control over what to do with them). You shouldn’t use FCFE or FCFF for valuation purposes if they’re expected to be negative for the foreseeable future and/or never expected to be positive (if they’re never expected to be positive, the company is worthless!). I’m sure the curriculum has additional things that you should keep in mind too, these are just the major ones I can recall.
if capital structure is unstable, use FCFF. on the other hand, use FCFE when capital structure is stable.
The way I remember is … don’t want to use FCFE if firm is raising a lot of debt (i.e. capital structure variable) because … FCFE calculation includes +/- net borrowing, so it’ll fluctuate too much / be unreliable
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