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Formula sheet/NISM Series XV: Research Analyst/Valuation Principles
[ VALUATION PRINCIPLES ]

Free Cash Flow to Firm (FCFF) & Free Cash Flow to Equity (FCFE)

FCFF(from EBIT):FCFF=EBIT×(1−t)+D&A−Capex−ΔNon-Cash Working CapitalFCFF (\text{from EBIT}): FCFF = EBIT \times (1 - t) + D\&A - Capex - \Delta \text{Non-Cash Working Capital}
FCFF(from CFO):FCFF=CFO−Capex+Interest Expense×(1−t)FCFF (\text{from CFO}): FCFF = CFO - Capex + \text{Interest Expense} \times (1 - t)
FCFE:FCFE=CFO−Capex−Interest Expense±Net Debt Issued/(Repaid)FCFE: FCFE = CFO - Capex - \text{Interest Expense} \pm \text{Net Debt Issued}/(Repaid)
FCFE(from PAT):FCFE=PAT+D&A−Capex−ΔNon-Cash Working Capital+Net BorrowingsFCFE (\text{from PAT}): FCFE = PAT + D\&A - Capex - \Delta \text{Non-Cash Working Capital} + \text{Net Borrowings}
Variables

FCFF is discounted at WACC to get Firm Value; FCFE is discounted at Cost of Equity (kek_{e}) to get Equity Value directly. t: Marginal corporate tax rate; D&A: Depreciation & Amortisation; Capex: Capital expenditure; Δ\Delta Non-Cash Working Capital: Change in non-cash net working capital.

Worked examples
Free Cash Flow to Firm (FCFF) and Equity (FCFE)

Infosys reports EBIT of Rs 28,000 Cr, Tax Rate 25%, Depreciation Rs 4,000 Cr, Capex Rs 3,200 Cr, and Non-Cash Working Capital Increase Rs 800 Cr. Finance Cost is Rs 200 Cr, and Net Debt issued during the year is Rs 500 Cr. Calculate FCFF and FCFE.

Two-Stage DCF Valuation with Terminal Value & Equity Value

CleanEnergy Ltd projects FCFF of Rs 500 Cr (Year 1), Rs 650 Cr (Year 2), and Rs 800 Cr (Year 3). Beyond Year 3, FCFF will grow perpetually at 5% p.a. WACC is 12%. The company has Debt of Rs 2,000 Cr and Cash of Rs 500 Cr. Total shares = 10 Crore. Calculate Enterprise Value, Equity Value, and Target Price per share.