FCFF
Free Cash Flow to Firm
Short definition
FCFF is unlevered free cash flow belonging to all capital providers, before interest payments. It is discounted at WACC; interest is not deducted in FCFF.
Detailed explanation
The idea is cash generation independent of financing. Interest already sits in WACC via Kd; deducting it again in FCFF double-counts the cost of debt. If cash tax diverges from NOPAT, use FCFF = EBIT − cash tax + D&A − capex − ΔNWC.
An increase in NWC is an outflow, a decrease an inflow. Do not deduct the stock of NWC each year. Terminal recovery of NWC can create positive FCFF at the horizon.
Why it matters for the CFO
Enterprise value is the present value of explicit FCFF plus terminal value. If FCFF is built correctly, a recapitalisation leaves FCFF unchanged and moves WACC and equity value.
How it is calculated
FCFF = NOPAT + Amortisman − CapEx − ΔNWC
NOPAT is finance-independent. D&A is added because it is non-cash; capex and ΔNWC are deducted because they are cash. Interest is absent.
Variables in the formula
- FCFF: Free cash flow to all capital providers
- NOPAT: EBIT × (1 − T)
- ΔNWC: Increase in net working capital
How to read it
Negative FCFF may be growth capex or weak collections. In the terminal value, g ≥ WACC is undefined. Do not mix nominal FCFF with a real WACC in high inflation.
Numerical example
NOPAT 60 mn TL, D&A 20 mn TL, capex 25 mn TL, ΔNWC +15 mn TL → FCFF = 60 + 20 − 25 − 15 = 40 mn TL.
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Definitions are educational. They are not investment, credit or tax advice.