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nism-series-xv-fcfe-computation-example[ RESEARCH ANALYST ]
A firm reports Cash Flow from Operations of Rs. 450 crore, Capital Expenditures (Capex) of Rs. 150 crore, and Net Debt Repayments of Rs. 60 crore during the year. What is the Free Cash Flow to Equity (FCFE) generated for equity shareholders?
[ A ]Rs. 240 crore[ CORRECT ]
[ B ]Rs. 360 crore
[ C ]Rs. 540 crore
[ D ]Rs. 300 crore
Takeaway
Option A is correct: Rs. 240 crore
Derivation
Free Cash Flow to Equity (FCFE) measures the cash available for distribution to equity shareholders after funding capital reinvestment and meeting net debt financing obligations: FCFE = Cash Flow from Operations (CFO) - Capital Expenditures (Capex) - Net Debt Repayments (or + Net Borrowings). Substituting the figures: FCFE = Rs. 450 crore - Rs. 150 crore - Rs. 60 crore = Rs. 240 crore. FCFE is discounted using the Cost of Equity (Ke) to arrive at the intrinsic value of common equity. This tests direct FCFE cash flow modeling. The common error is adding debt repayments instead of deducting them.
Why the others fail
B — Rs. 360 crore
Rs. 360 crore incorrectly adds net debt repayments of Rs. 60 crore instead of subtracting cash used to retire debt.
C — Rs. 540 crore
Rs. 540 crore erroneously adds both capex (150) and debt repayments (60) to operating cash flows instead of subtracting them.
D — Rs. 300 crore
Rs. 300 crore omits the deduction of net debt repayments (450 - 150), calculating Free Cash Flow before financing.
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