Free Cash Flow to the Firm (FCFF)
Free Cash Flow to the Firm (FCFF)
Cash generated by operations for all capital providers, before any financing: operating cash flow plus after-tax interest (added back because CFO is after interest) minus capital expenditures.
When to use: Use as the cash flow in an enterprise DCF, discounted at WACC to value the whole business; subtract net debt to reach equity value.
Formula
Variables
| Symbol | Name | Description | Unit |
|---|---|---|---|
| FCFF | FCFF | Free cash flow to the firm | $ |
| CFO | Cash Flow from Operations | Net cash from operating activities | $ |
| Interest | Interest Expense | Interest paid on debt for the period | $ |
| TaxRate | Tax Rate | Marginal corporate tax rate, as a decimal | % |
| CapEx | Capital Expenditures | Cash spent on property, plant and equipment | $ |
Real-Life Examples
Example 1: Leveraged Industrial
CFO $500M, interest $80M, tax rate 25%, capex $150M.
Given
Step-by-Step
$410M is available to lenders and shareholders together. The $60M add-back undoes the interest deduction inside CFO, since FCFF is measured before financing.
Example 2: Thin Margins, Heavy Capex
CFO $220M, interest $30M, tax rate 21%, capex $180M.
Given
Step-by-Step
Only $63.7M for all capital providers after capex. With $30M of interest to pay, little is left for equity, which matches the zero FCFE in the companion example.
Frequently Asked Questions
Operating cash flow is reported after interest paid. FCFF is meant to be before any payment to capital providers, so interest goes back in, net of the tax it saved.
Yes: EBIT(1 − t) + depreciation − capex − change in working capital. It gives the same figure when the statements reconcile; this cash-flow-statement form needs fewer inputs.