Alternative Mathematical Formula
FCF measures
- operating cash flow (OCF)
- less expenditures necessary to maintain assets (capital expenditures or "capex")but this does not include increase in working capital.
- less interest charges
In symbols:
where
- OCBt is the firm's net operating profit after taxes (Also known as NOPAT) during period t
- It is the firm's investment during period t including variation of working capital
Investment is simply the net increase (decrease) in the firm's capital, from the end of one period to the end of the next period:
where Kt represents the firm's invested capital at the end of period t. Increases in non-cash current assets may, or may not be deducted, depending on whether they are considered to be maintaining the status quo, or to be investments for growth.
Unlevered Free Cash Flow (i.e., cash flows before interest payments) is defined as EBITDA - capex - changes in net working capital - taxes. This is the generally accepted definition. If there are mandatory repayments of debt, then some analysts utilize levered free cash flow, which is the same formula above, but less interest and mandatory principal repayments.
Investment bankers compute Free Cash Flow using the following formula:
FCFF = After tax operating income + Noncash charges (such as D&A) - Capex - Working capital expenditures + Interest*(1-t)= Free Cash Flows to the Firm (FCFF)
FCFE = Net income + Noncash charges (such as D&A) - Capex - Change in Non Cash Working Capital + Net Borrowing = Free Cash Flows to the equity (FCFE)
Or simply:
FCFE = FCFF + Net borrowing - Interest*(1-t)
Read more about this topic: Free Cash Flow
Famous quotes containing the words alternative, mathematical and/or formula:
“If English is spoken in heaven ... God undoubtedly employs Cranmer as his speechwriter. The angels of the lesser ministries probably use the language of the New English Bible and the Alternative Service Book for internal memos.”
—Charles, Prince Of Wales (b. 1948)
“All science requires mathematics. The knowledge of mathematical things is almost innate in us.... This is the easiest of sciences, a fact which is obvious in that no one’s brain rejects it; for laymen and people who are utterly illiterate know how to count and reckon.”
—Roger Bacon (c. 1214–c. 1294)
“I feel like a white granular mass of amorphous crystals—my formula appears to be isomeric with Spasmotoxin. My aurochloride precipitates into beautiful prismatic needles. My Platinochloride develops octohedron crystals,—with a fine blue florescence. My physiological action is not indifferent. One millionth of a grain injected under the skin of a frog produced instantaneous death accompanied by an orange blossom odor.”
—Lafcadio Hearn (1850–1904)