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FCFF, FCFE, and Equity Value When a Company Has No Debt

Article Quant Q&A · Author: Matthias
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Summary

The document asks whether free cash flow to the firm and free cash flow to equity coincide for a company with no interest-bearing debt, and whether equity value can then be calculated as operating value plus cash. The answer agrees that the two cash flow measures may coincide in the stated no-debt setup, but cautions that this does not guarantee the market value of equity equals discounted cash flows plus the company’s cash. Market prices may reflect other considerations, including the firm’s business and macroeconomic conditions.

This exchange highlights the distinction between a model-based valuation and the price investors assign to a security. It offers no detailed assumptions, valuation formula, or numerical analysis, and does not clarify the treatment of excess versus operating cash or other balance-sheet claims. Its conclusion is therefore a brief conceptual caution, rather than a complete valuation procedure.

Key ideas

  • With no interest-bearing debt, FCFF and FCFE may coincide under suitable assumptions.
  • A discounted cash flow estimate plus cash does not necessarily determine the market price of equity.
  • Market valuation can reflect business-specific and macroeconomic considerations.
  • The answer does not specify how cash or other balance-sheet items should be treated.

Tags

EquitiesPortfolio construction
Full text
# Free cash flows to the firm (FCFF) and no debt


# Free cash flows to the firm (FCFF) and no debt












I have a company with zero interest bearing debt and 10M in cash.

Since there is no debt: Am I correct in assuming that the Free cash flows to equity (FCFE) and Free cash flows to the firm (FCFF) will be the same?

Am I correct in assuming that the market value of the security will be

NPV + Cash

Regardless of if I take the FCFF or FCFE route?

## Answer by Alexander (score 1)

https://quant.stackexchange.com/a/30910

I think you're right regarding FCFE and FCFF, but I'm not sure you can say what is the market value of the equity, since the market might price in other factors of the firm business nature (macro economic factors for example), besides NPV and cash.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.