Free cash flow to equity (FCFE)
Principles of Finance glossary · Valuation of Bonds & Stocks
Definition
Cash flow available to common shareholders after operating, investing, and net debt-financing activities: FCFE = FCFF - after-tax interest + net borrowing, equivalently the dividend the firm could pay without external equity issuance. Discounted at the cost of equity to obtain equity value directly.
Free cash flow to equity (FCFE) in plain English
Free cash flow to equity (FCFE) is the real spendable cash left over for a company's shareholders after it has paid all its bills, invested in itself, and settled up with its lenders (paying interest and handling new loans or repayments). In plain terms, it's the biggest dividend the company could hand its owners without having to sell new shares to raise cash. One way to compute it: start with the cash available to everyone (FCFF), subtract the after-tax interest paid to lenders, then add back any net new borrowing — FCFE = FCFF - after-tax interest + net borrowing. Because it's the shareholders' slice, you value it using the return shareholders expect (the cost of equity) to get the value of the company's stock directly.
Also called: FCFE
Learn these first
Related Principles of Finance terms
Principles of Finance practice questions · Principles of Finance flashcards · Principles of Finance study guide