Stock Valuation , Free Cash Flow to Equity

Stock Valuation

Section: 9 Free Cash Flow to Equity

How would we value the share of a company that pays no dividends? Many companies in their initial years or during periods of high growth pay no dividend. To counter the problem of companies not paying out what they can afford to in dividends, you might consider a broader definition of cash flow, which can be called Free Cash Flow to Equity (FCFE), defined as the cash left over after operating expenses, interest expenses, net debt cash flows, and reinvestment needs. Net debt cash flows refer to the difference between new debt issued and old debt repaid. In reinvestment needs, you include any new investments that the firm has to make in long-term assets (such as land, buildings, equipment, research etc) and short-term assets (such as inventory and accounts receivables) to generate future growth.

In general, FCFE can be calculated as:

FCFE

Net Income – additions to working capital – capital expenditure – old debt repaid + new debt issued

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