Free cash flow (FCF)

What it means

Cash available after the investment needed to maintain the business. FCFF is available to all capital providers; FCFE is what remains for equity holders after debt service.

The exam angle

Discount FCFF at WACC, FCFE at the cost of equity. Mixing the two is the most common valuation error in the exam.

Where it appears in the syllabus

• Financial Statement AnalysisCFA Level I · exam weight 11–14% · The three statements, inventories, long-lived assets, quality of earnings.
• EquitiesCFA Level I · exam weight 11–14% · Market organisation, indexes, industry analysis, dividend models.
• EquitiesCFA Level II · exam weight 10–15% · DDM, free cash flow, multiples, residual income, private companies.

Related terms

• Book valueThe accounting value of equity: assets less liabilities as reported.
• Earnings per shareNet income available to common shareholders, divided by the weighted average shares outstanding.
• EBITDAEarnings before interest, tax, depreciation and amortisation — a rough proxy for operating cash generation.
• Return on equityNet income as a percentage of average shareholders’ equity.
• Accrual accountingRecognising revenue when it is earned and expenses when they are incurred, regardless of when cash moves.
• Balance sheetA statement of what a company owns and owes at a single point in time.