free cash flow to the firm

[yasser almansoor]

hello every one, hope that all of you is fine
in the refrence to the (FCFF) i know that it’s the excees of the operating cash flow availabe to the company’s suppliers of equity and debt and it’s = net income + non cash outflow - capital expinditures - working capital expenditures.
but my question is how the free cash determine without subtract the out flow of the rest components of the investment activities for example (purchase bond of other company) and the financing activities outflow??
if the company repurchase its stock, they paid the outflow from the inflow of the operation activity, so why we dont substract the amount of repurchase stock to determine the FCFF?

 

[Oscar]

Hi,
I think your defintion of the Free Cash Flow to the Firm (FCFF) is not entirely correct, as you forgot to add-back the tax-shields (1-t)*i.
As such, the definition would be:
1. Starting from net income:
Net income
+ Depreciation and other non cash items
- Gains/+losses from capital disposals
+ Tax-shield (1-t)*1
- Delta Net working capital
- CAPEX
= Free Cash Flow to the Firm (FCFF)
or
2. starting from operating cash flow (US GAAP):
Operating cash flow (OCF)
+ Tax-shield (1-t)*1
- CAPEX
= Free Cash Flow to the Firm (FCFF)
Regarding your questions:
The FCFF is defined as the cash flow available to all capital holders. This means that it is the cash flow which is available to debt holders (like bondholders) and equity shareholders. In summary, it is exactly the total of cash flow available in a certain period to be distributed for debt repayments or payments to shareholders (dividends, buybacks, etc.) or simply for retention.
In contrary the Free Cash Flow to Equity (FCFE) is the cash flow available to the equity shareholders only.
Free Cash Flow to the Firm (FCFF)
- Net borrowings
+ Tax-shield (1-t)*1
= Free Cash Flow to Equity (FCFE)
This is the money left in a certain period a firm can use for dividends dividends, buybacks or simply for retention.
Note that both cash flow measures and definitions a very important when it comes to company / equity valuation.
Hope this helps.
Best,
Oscar