💡 FCFF (Free Cash Flow to Firm) and FCFE (Free Cash Flow to Equity) based DCF models may or may not result in the same valuation.
💰 FCFF represents cash flows available to all capital providers (debt and equity holders), while FCFE represents cash flows available to equity holders only.
📊 Differences arise due to the treatment of debt and interest payments:
FCFF includes interest payments as a cash flow.
FCFE deducts interest payments as they are considered cash flows to debt holders.
⚖️ The choice between FCFF and FCFE depends on the context and purpose of the valuation:
FCFF is suitable for valuing the entire firm.
FCFE is more appropriate for valuing equity specifically.
🔄 Valuation results can differ due to:
Assumptions about reinvestment needs and debt obligations.
Treatment of interest payments.
Discounting at different rates (WACC vs. cost of equity).
Focus on enterprise value (FCFF) or equity value (FCFE).
✅ Valuations may converge when there is minimal debt or a stable capital structure.
🔍 Analysts should consider the company's capital structure and valuation objectives when choosing between FCFF and FCFE.
💼 FCFF-based DCF provides enterprise value, while FCFE-based DCF provides equity value.
⚠️ It's important to note that FCFF is a comprehensive measure, while FCFE is more focused on equity valuation.
🔀 Variations in assumptions, inputs, and estimation techniques can lead to different valuation results.