Free Cash Flow to Equity Spreadsheet
Company Share Price Valuation using Free Cash Flow to Equity
This spreadsheet values a company's share price by using the Free Cash Flow to Equity model. The Free Cash Flow to Equity is defined as the sum of the cash flows to the equity holders in the firm.
The Free Cash Flow to Equity (FCFE) is calculated as follows:
FCFE = EBIT * (1-Tax rate) + Depreciation - Capital expenditure - Change in Working Capital + New debt issued - Debt repayments
The terminal value of the firm's equity beyond the projection horizon is also estimated and added to the cash flow. The final cash flow discounted with the cost of equity provides the equity value.
Comparisons with Free Cash Flow to Firm
The main difference between Free Cash Flow to Equity (FCFE) and Free Cash Flow to Firm (FCFF) is the treatment of debt. FCFE can be thought of as follows:
FCFE = FCFF + New debt issued - Debt repayments
The following are inputs to be entered into the spreadsheet as assumptions. The values will be used by other parts of the spreadsheet.
- Cost of Equity - This is used to discount the cash flow to equity.
- Tax Rate - Company's Tax Rate
- Growth rate of Cash Flow after projection horizon - A fix growth rate after the projection horizon. This growth rate is used in the estimation of the Terminal Value of the company.
- Value of Non Operating Assets - The Discounted value of the Free Cash Flow to Equity yields the value of the operating assets. The equity value can be derived by adding the value of the Non Operating Assets from the value of the operating assets.
- Number of Common Shares - The equity value will be divided by the number of common shares to determine the price per share.
The Earnings before Interest & Taxes (EBIT) is calculated as follows:
Earnings before Interest & Taxes(EBIT) = Net Sales - Total Variable Costs - Total Fixed Costs - Depreciation
Net income is calculated as follows:
Net income = EBIT - Taxes
Net Debt is calculated as follows:
Net Debt = New Debt Issued - Interest * (1 - Tax Rate) - Existing Debt Principal Repayments
The reason for multiplying the Interest with (1- Tax Rate) is because Interest can be used as a Tax Shield.
Net Working Capital and Investment (Capital Spending)
The Net Working Capital and Investment (Capital Spending) are taken into account in these two sections.
The Net Working Capital at Year 0 can be entered directly into the spreadsheet. From Year 1 onwards, it is calculated as a function over Net Sales as follows:
Net Working Capital = Net Working Capital over Sales * Net Sales
Net Working Capital cash flow is calculated as follows:
Net Working Capital cash flow = -(Current Year Net Working Capital - Previous Year Net Working Capital) + NWC Recovery at end
Aftertax salvage value is calculated as follows:
Aftertax salvage value = Salvage value * (1 - Tax Rate)
Net Capital Spending is calculated as follows:
Net Capital Spending = Initial Investment + Aftertax salvage value
Projected Free Cash Flows
This section uses the value from the Net Working Capital, Investment (Capital Spending), EBIT and Depreciation to calculate the Free Cash Flow to Equity.
Free Cash Flow to Equity (FCFE)
FCFE = EBIT * (1-Tax rate) + Depreciation + Net Debt - Capital expenditure - Change in Working Capital
The Terminal Value of the Firm's Equity is estimated as follows:
Terminal Value = Final Year Cash Flow * (1+Growth rate of Cash Flow after projection horizon) / (WACC Discount Rate - Growth rate of Cash Flow after projection horizon)
Operating Value is calculated as follows:
Value of Operating Assets = Net Present Value of Cash Flows + Discounted Terminal Value
Equity Value is calculated as follows:
Equity Value = Value of Operating Assets + Value of Non Operating Assets
Download Free Cash Flow To Equity spreadsheet - v1.0
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