Module I· Cash Flow Statement ConstructionBasic
Question
What is free cash flow (FCF) — the basics?
Answer
Two definitions — critical to keep apart
FCFF (unlevered)
```
EBIT × (1−t) + D&A − Capex − ΔNWC
```
Cash for ALL capital providers (equity + debt). The standard for a DCF (enterprise value).
FCFE (levered)
```
OCF − Capex + Net Borrowing
```
For equity holders only. The standard for a DDM, equity DCF, and LBO cash-sweep logic.
IB practice
- DCF context: 'FCF' = FCFF
- LBO context: 'FCF' = FCFE
Rule of thumb
FCF/sales >8% = solid; >15% = strong.