Estimating Free Cash Flow

Estimating FCFF or FCFE requires a complete understanding of the company and its financial statements. To provide a context for the estimation of FCFF and FCFE, we first use an extensive example to show the relationship between free cash flow and accounting measures of income.

For most of this section, we assume that the company has two sources of capital, debt and common stock. Once the concepts of FCFF and FCFE are understood for a company financed by using only debt and common stock, it is easy to incorporate preferred stock for the relatively small number of companies that actually use it.

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