CFA Level 2 | Equity Valuation: Calculating FCFF and FCFE from Financial Statements

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CFA Level 2
Topic: Equity Valuation
Reading: Free Cash Flow Valuation
The free cash flow is a key input into the Discounted Cashflow (DCF) model.
When free cashflow to the firm (FCFF) is used in the DCF model, the output is the firm value.
When free cashflow to equity (FCFE) is used in the DCF model, the output is the equity value.
In this video, we will explore the different variations in computing FCFF and FCFE.
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Link to Excel file: drive.google.com/open?id=1EPV...
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[@makeittrades5750]

This is how teaching is done, well done! 1. Real examples with numbers drawn from the actual statements 2. Explaining that they mean 3. Showing how the different variations on how you can obtain the same number I am going through the FMVA certification, and honestly they could do a much better in the business valuation model.

[@tafarapaul]

The best explanation I've seen so far, Bravo 👏👏

[@Standbyualways]

Thank you for the unlimited variations. It's in-depth and well-thorough.

[@siddhantgala7461]

Amazing video! Very grateful, thank you!

[@manhthang3635]

Great. Thank you so much.

[@binhvong5297]

Thank you so much for this video. I have seen this video 10X and I am still learning from it. It is very comprehensive and detailed, I appreciated all the step by step calculations!

[@FabianMoa]

Glad it was helpful, Binh!

[@davidgu3555]

you are amazing! This explanation is so clear, thank you for doing this!

[@FabianMoa]

Glad it was helpful, David!

[@johnnywong9652]

very clear indeed thank you!

[@Iano_Ante]

Pretty well explained

[@purudate4049]

Greetings! the most comprehensive coverage of FCFF and FCFE. This presentation enables a student to utilize financial statements available in a variety of formats to calculate FCFF or FCFE. Thanks for your time and efforts. God bless you. I have edited my comment to insert a queries to you. (1) Please skip to 12:39 regarding derivation of FCFE from FCFF. FCFE is the free cash exclusively available to Equity shareholders. Now in the example, change in notes payable and Long-Term Debts is positive ( implies cash inflow). Why do we add it to derive FCFE? (2) Why is interest * (1-Tax Rate) or Interest after Tax deduction is included?

[@FabianMoa]

Thank you for the kind words! It's great to hear that you found the presentation on FCFF and FCFE comprehensive and useful.

[@purudate4049]

@@FabianMoa Why is interest * (1-Tax Rate) or Interest after Tax deduction is included? or in another variation EBIT * (1- Tax Rate) is calculated? I am more keen to know the reason to apply (1-Tax rate)?

[@alexandralyu836]

thanks for sharing

[@brendonneuhaus1613]

Fantastic explanation. Thanks!

[@FabianMoa]

Glad it was helpful!

[@siyatong6211]

wow amazing explanation!! thank you!!!

[@FabianMoa]

Glad you liked it!!

[@ukadavid9432]

Thank you for this, it was enlightening. However, amongst the current assets and liabilities, why did you leave out cash and equivalent as well as notes payables when calculating working capital?

[@alexeypiletskiy9958]

Great explanation! what we should do if would have the positive Change in working capital +70 would it look like ? -> FCFF = 330+250+200*(1-0.4)-500+70

[@chekimngan3590]

Thank you so much for this video. I would like to ask regarding FCFF = EBIT (1-T) + Dep - WCInv − FCInv. Why do we add only depreciation not Non cash charges?

[@ammarimtiaz88]

I have a company that has two classes of shares, it pays dividends to only the non-listed share holders instead of class A listed shareholders. Should I do a FCFF valuation or FCFE valuation. If I go for the FCFF valuation, how should I treat my dividends?

[@karimk9448]

Amazing video Fabian. Interesting how many approaches can lead you to the same outcome. I have a question please, why is Interest*(1-T) added to calculate the FCFF? Thanks

[@FabianMoa]

If we just take two terms out from FCFF: NI + Int(1 - T) = (EBIT - Int)(1 - T) + Int(1 - T) = EBIT(1 - T) - Int (1 - T) + Int(1 - T) = EBIT(1- T) Adding back Int(1-T) cancels off the interest deducted and the interest tax shield, so the resulting EBIT(1-T) is the earnings that is available to all investors (i.e. equity holders and debtholders)

[@karimk9448]

@@FabianMoa cheers!

[@capslock4916]

Thank you so much🙏🏻 One question- Why is Notes Payable not considered . Is notes Payable for a period great than a year and treated as Long term liability?

[@FabianMoa]

It's treated as short term debt, which is part of Net Borrowing in FCFE

[@capslock4916]

@@FabianMoa 🙏🏻🙏🏻

[@prepvisuals]

I am wondering, did you need to undergo some formalities with the CFA Institute to create content from their curriculum? Thinking to do something like this too but I am receiving no answer from the CFA institute with this regard…your insights would be so much appreciated!!

[@FabianMoa]

I did not. As long you as you don't use copyrighted materials (e.g., direct copy from their curriculum), it's fair use.

[@vinodkbal7442]

KINDLY SHARE THE WORKING SHEET

[@AndriFitness]

this is great - are you able to share your excel spreadsheet?

[@FabianMoa]

Oh right. I forgot to share it out. Will share it out later.

[@FabianMoa]

Done. You can find the link to the Excel file in the video description.

[@AndriFitness]

@@FabianMoa thank you so much. Love your work.

[@FabianMoa]

No problem! Thank you for the support!

[@ju-gi3sv]

Why do you calculate Working Capital without CCE in the current asset part ? Isn't part of the formula ?

[@ju-gi3sv]

Same for Notes payable

[@heavyduty5125]

Was wondering the same

[@user-yk8ir7si8j]

i have a quetion the account ''Income taxes payable'' should be include in the calculation of Accured taxes and expenses ?

[@FabianMoa]

Yes

[@user-yk8ir7si8j]

@@FabianMoa thank you for answering, i also want to ask you if i can just calculate the difference in the ''Total Debt (long term debt + short term debt) to find the Net Borrowing ?

[@FabianMoa]

Yes, you can

[@user-yk8ir7si8j]

@@FabianMoa My firend can you do me a favor? I have calculate the FCFE from net income for Pfizer Q3 2023, can you do the same to check if we find the same number? Do you have an email or a linkedin to send you the screenshot with the result i found from my excel ?

[@MrDiegox9320]

FCF = FCFF ? I’m confused because of the different formulas in corporate finance lectures and in equity lectures

[@FabianMoa]

Yes, FCF = FCFF

[@quangvo5359]

what is the most commonly used fcff formula sir?

[@FabianMoa]

The one that starts from EBIT(1-tax rate) is common

[@quangvo5359]

@@FabianMoa Thank you