This preview shows page 1. Sign up to view the full content.
Unformatted text preview: or accounts receivable, for
instance) will reduce cash flows whereas a decrease in working capital will increase
cashflows. Making this adjustment essentially converts accrual earnings to cash
• You will subtract out the net cashflow resulting from debt. Debt repayments
represent cash outflows whereas new debt represents cash inflows. The difference
between the two should affect your cashflow to equity.
Free Cashflow to Equity (FCFE) = Net Income + Depreciation and Amortization –
Capital Expenditures – Change in non-cash working capital – (Debt Repayments –
New Debt issues)
Note that the net cashflow from debt can be positive if debt issues exceed debt repayments.
Conservative analysts who do not want dividends to be funded by net debt issues often
compute a conservative version of free cashflow to equity, which ignores net debt cashflows:
Conservative FCFE = Net Income + Depreciation and Amortization – Capital
Expenditures – Change in non-cash working capital
While you can compute the FCFE using information in the income statement and the
balance sheet, you can also obtain it from the statement of cashflows.
How would the 21 firms that had payout ratios less than 80% in table 2.4 look like
if you compared dividends to FCF...
View Full Document
- Spring '11