Distinguish between free cash flow to firm and free cash flow to equity.

Particulars Free Cash Flow to Firm ("FCFF") Free Cash flow to Equity ("FCFE") Meaning FCFF is available to both equity and debt holders FCFE is available to common equity shareholders Leverage FCFF excludes the impact of leverage FCFE includes the impact of leverage Application FCFF is used to compute enterprise value FCFE is used to compute equity value Risk Factor Weighted average cost of capital is used for FCFF Cost of equity is used for FCFE Formulae FCFF = Profit After Tax (PAT) Add: Depreciation and Non-Cash Charges Cash Flow After Tax Less: Working Capital Changes Less: Change in Investment FCFF Alternative Formula: FCFF = Cash Flow from Operation Add: Interest * (1 - tax rate) Less: CAPEX FCFF FCFE = Profit After Tax (PAT) Add: Depreciation and Non-Cash Charges Cash Flow After Tax Less: Preference Dividend Less: Working Capital Changes Less: CAPEX Less: Repayment of Debt/Preference Shares Add: Proceeds from Debt/Preference Shares Add: New Debt issued FCFE