FCFE
Free Cash Flow to Equity
Short definition
FCFE is free cash flow left for equity holders after debt service and net borrowing. It is discounted at Ke, not at WACC.
Detailed explanation
From FCFF deduct after-tax interest and principal and add new draws. Alternative bridge: net income + D&A − capex − ΔNWC − principal + new debt (interest is already in net income). The two bridges must not count the tax shield twice.
FCFE is the cash counterpart of a dividend ceiling; legal reserves and RP covenants still bind. In a bullet year FCFE drops sharply — the maturity wall shows up in equity cash.
Why it matters for the CFO
Equity value is FCFE discounted at Ke. If FCFF–WACC and FCFE–Ke are not built as a pair, you value two different firms. Dividend policy sits on FCFE; it does not replace it.
How it is calculated
FCFE = FCFF − Faiz × (1 − T) − Anapara + Yeni borç kullanımı
Variables in the formula
- FCFE: Cash remaining for equity holders
- FCFF: Free cash flow to firm
- Interest: Interest expense
- Principal: Principal repayment
How to read it
Positive FCFF and negative FCFE: debt service exceeds operating cash. The reverse is net borrowing inflating equity cash — not a sustainable dividend. More leverage pulls FCFE forward and reverses it at maturity.
Numerical example
FCFF 40 mn TL, interest 20 mn TL, T 25%, principal 15 mn TL, new debt 0 → FCFE = 40 − 20×0.75 − 15 = 10 mn TL.
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Definitions are educational. They are not investment, credit or tax advice.