How this calculator works
Free cash flow to equity is the cash left for common shareholders after the business pays interest, reinvests in fixed assets and working capital, and borrows or repays debt. It can be built from several starting points. Starting from net income, add back depreciation, subtract capital spending and working capital growth, then add net borrowing. Starting from EBIT or EBITDA, first build free cash flow to the firm on an after-tax basis, then subtract after-tax interest and add net borrowing. Starting from operating cash flow, subtract capital spending and add net borrowing, because operating cash flow already includes interest and working capital. The five routes should give the same answer when the inputs are consistent.
Formula
From net income: FCFE = net income + depreciation - capital expenditure - working capital investment + net borrowing. From EBIT: FCFF = EBIT × (1 - tax) + depreciation - capital expenditure - working capital investment, then FCFE = FCFF - interest × (1 - tax) + net borrowing. From EBITDA: FCFF = EBITDA × (1 - tax) + depreciation × tax - capital expenditure - working capital investment. From operating cash flow: FCFE = operating cash flow - capital expenditure + net borrowing. Net borrowing = closing debt - opening debt.
Worked example
Net income of $200,000 plus $80,000 of depreciation less $120,000 of capital spending less $30,000 of working capital investment plus $20,000 of net borrowing gives FCFE of $150,000. Starting instead from EBIT of $300,000 at a 25 per cent tax rate: FCFF = $225,000 + $80,000 - $120,000 - $30,000 = $155,000, then FCFE = $155,000 - $30,000 × 0.75 + $20,000 = $152,500. The $2,500 gap is the difference between the net income entered and the $202,500 that EBIT, interest and tax actually imply.
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Frequently asked questions
Why do the starting points sometimes disagree?
They agree only if every input is measured consistently. Net income already includes after-tax interest, EBIT does not, and operating cash flow includes working capital movements. Mixing a starting point with the wrong adjustments produces a different answer.
What counts as net borrowing?
New debt issued minus debt repaid during the period. It is a financing inflow, which is why it is added in the FCFE formula. A negative figure means the company repaid more than it borrowed.
When should I use FCFE rather than FCFF?
Use FCFE when valuing equity directly and the company's debt ratio is stable. Use FCFF when the capital structure is changing or when you want a value for the whole firm before subtracting debt. The two approaches should agree when the assumptions line up.