What is the Difference Between FCFF and FCFE?

The main difference between Free Cash Flow to Firm (FCFF) and Free Cash Flow to Equity (FCFE) lies in their focus on different stakeholders and the considerations they make for a company's capital structure. Here are the key differences between FCFF and FCFE:

1. Stakeholders: FCFE is designed to estimate the cash flow available to a company's equity holders after deducting all capital debt repayments and other cash outflows required to maintain its current operations. In contrast, FCFF represents the cash flow available to both debt and equity holders after accounting for all operating and non-operating expenses, including taxes and capital expenditures.
2. Capital Structure: FCFE assumes that a company doesn't issue or retire any debt, making it more suitable for companies with a stable capital structure and a low risk profile. FCFF, on the other hand, doesn't make this assumption and considers a company's capital structure.
3. Discount Rate: The FCFF method utilizes the weighted average cost of capital (WACC), which considers the cost of both debt and equity. In contrast, the FCFE method utilizes the cost of equity only.
4. Treatment of Debt: The FCFF method subtracts debt at the very end to arrive at the intrinsic value of equity. The FCFE method integrates interest payments and net additions to debt to arrive at FCFE.
5. Valuation: FCFF is used for enterprise valuation, while FCFE is used for equity valuation.

In summary, FCFE is more suitable for businesses with a stable capital structure and low risk profile, while FCFF is more appropriate for businesses with a dynamic capital structure. Both methods have their advantages and disadvantages, and the choice between them depends on the specific context and goals of the analysis.

Comparative Table: FCFF vs FCFE

Free Cash Flow to Firm (FCFF) and Free Cash Flow to Equity (FCFE) are two different forms of free cash flow measurements used in valuation. Here are the key differences between FCFF and FCFE:

In summary, FCFF and FCFE are both used in valuation, but FCFF is used for enterprise valuation and takes into account the cash flow available to all suppliers of capital, while FCFE is used for equity valuation and focuses on the cash flow available to common stockholders. The discount rates and treatment of debt also differ between the two methods, with FCFF using WACC and subtracting debt at the end, and FCFE using the cost of equity and integrating interest payments and net additions to debt throughout the process.