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nism-series-xv-fcfe-free-cash-flow-to-equity-formula-calculation[ RESEARCH ANALYST ]

A firm reports Net Income of ₹600 Crore, Depreciation of ₹180 Crore, CapEx of ₹280 Crore, increase in Working Capital of ₹50 Crore, and Net Borrowings (Debt Issued minus Debt Repaid) of +₹100 Crore. What is the Free Cash Flow to Equity (FCFE)?

[ A ]₹550 Crore [ Net Income + D&A - CapEx - ΔWC + Net Borrowings = ₹600 + ₹180 - ₹280 - ₹50 + ₹100 ][ CORRECT ]

[ B ]₹450 Crore (Forgetting to add Net Borrowings of ₹100 Cr)

[ C ]₹730 Crore

[ D ]₹350 Crore

Takeaway

Option A is correct: ₹550 Crore [ Net Income + D&A - CapEx - ΔWC + Net Borrowings = ₹600 + ₹180 - ₹280 - ₹50 + ₹100 ]

Derivation

Starting from Net Income of ₹600 Crore, add back the non-cash Depreciation charge of ₹180 Crore and subtract the ₹50 Crore absorbed by rising Working Capital, giving an operating cash flow available to equity of ₹730 Crore. Deduct CapEx of ₹280 Crore, since equity holders only get cash left over after the business reinvests: ₹730 − ₹280 = ₹450 Crore. Finally add the ₹100 Crore of Net Borrowings, because new debt raised is cash flowing to equity holders' benefit even though it came from lenders: ₹450 + ₹100 = ₹550 Crore. FCFE differs from FCFF in this last step — it reflects cash available to shareholders after debt flows, which is why it's discounted at Cost of Equity rather than WACC.

Why the others fail

B — ₹450 Crore (Forgetting to add Net Borrowings of ₹100 Cr)

Reaches ₹450 Crore correctly through Net Income, D&A, CapEx, and Working Capital, but stops there without adding the ₹100 Crore of Net Borrowings that also benefits equity.

C — ₹730 Crore

Omits the CapEx deduction of ₹280 Crore entirely, overstating the cash actually available to equity holders after the firm's required reinvestment.

D — ₹350 Crore

Subtracts the ₹100 Crore of Net Borrowings instead of adding it; new debt raised is a cash inflow that benefits equity holders, not an outflow against them.