The topic materials describe valuation using free cash flows for all debt and equity stakeholders as well as free cash flows for equity shareholders

Free cash flow to equity is a measure of how much cash is available to the equity shareholders of a company after all expenses, reinvestment, and debt are paid. FCFE is a measure of equity capital usage (Whalen, Baginski, & Bradshaw, 2018).

Free cash flow to equity is composed of net income, capital expenditures, working capital, and debt. Net income is located on the company income statement. Capital expenditures can be found within the cash flows from the investing section on the cash flow statement. Free cash flow to equity (FCFE) is the amount of cash a business generates that is available to be potentially distributed to shareholders. It is calculated as Cash from Operations less Capital Expenditures plus net debt issued.

FCFF stands for Free Cash Flow to the Firm and represents the cash flow that’s available to all investors in the business (both debt and equity).The only real difference between the two is interest expense and their impact on taxes. Assuming a company has some debt, its FCFF will be higher than FCFE by the after-tax cost of debt amount.

References

Whalen, J., Baginski, S., & Bradshaw, M. (2018). Financial reporting, financial statement analysis and valuation (9th ed.). [Adobe Digital Editions version]. Retrieved from https://www.gcumedia.com/digital-resources/cengage/2018/financial-reporting-financial-statement-analysis-and-valuation_9e.php

Dividend valuation model is one of the formulas that is useful in finding the overall value of the stock. Some of the advantages and disadvantages of this model exists and the company used as an example is Apple Inc. company that have been confirmed to be having both advantages and disadvantages of this model. As such, one benefit of the model is that it is a conservative model of valuation because it does not require growth assumptions to create value. Apple Incl. uses this formula to predict about the future of the dividends by considering the current happenings. Another advantage of the model is that is easy to comprehend and as such, Apple company uses it for valuation of any stock that have dividends.

The disadvantage of the model is that it is over simplistic and this makes its applications to be limited to companies that have consistent growth in dividend. Like many companies, Apple have flaws in the rate at which the dividend’s rate grow. The other disadvantage of the model is that it only work for the stock companies that pays dividends and the problem is that not all companies are good at paying dividends. Lastly, the model is not good in including the non-dividend factors.