Free Cash Flow to Firm
FCFF = EBIT(1-T) + D&A - CapEx - ΔNWC
Cash available to all capital providers after reinvestment. FCFF is the foundation of enterprise DCF valuation.
Variables
Operating profit
Corporate tax rate
Non-cash charges added back
Investment in fixed assets
Increase in operating current assets minus current liabilities
Example Calculation
Scenario
EBIT = $500K, Tax = 25%, D&A = $80K, CapEx = $120K, ΔNWC = $30K.
Given Data
Calculation
FCFF = 500,000 × 0.75 + 80,000 - 120,000 - 30,000 = 375,000 + 80,000 - 150,000 = 305,000
Result
$305,000
Interpretation
The firm generates $305K in free cash flow available to both debt and equity holders.
When to Use This Formula
- ✓DCF enterprise valuation
- ✓Assessing a firm's cash generation ability
- ✓Comparing operating performance across firms
Common Mistakes
- ✗Forgetting to add back depreciation
- ✗Ignoring working capital changes
- ✗Using net income instead of EBIT(1-T)
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Common questions about this formula
FCFF is available to all investors. FCFE subtracts debt payments and is available only to equity holders.
Depreciation is a non-cash expense that reduces taxable income but does not represent an actual cash outflow. Adding it back converts earnings into a cash-based measure. The actual cash outflow for replacing assets is captured separately in CapEx.