The formula
FCFE = FCFF - Interest × (1 - t) - Net debt repayment.
Net debt issued vs. repaid
On the cash flow statement, look at the financing section. "Proceeds from long-term debt" (or similar) is a cash inflow. "Repayments of long-term debt" is an outflow. Net debt repayment = repayments - proceeds; if net is negative the firm is a net borrower and equity holders received more cash than the FCFF figure implies.
Worked walk
FCFF (from prior worksheet)$102,540
Less: after-tax interest expense [3,700 * (1 - 0.21)]($2,923)
Less: net debt repayment($8,500)
FCFE$91,117
Microsoft FY24 10-K financing section illustrates this pattern in scale[MSFT 10-K].
When to prefer FCFE
- You are valuing equity directly and your discount rate is cost of equity.
- You are testing whether dividend capacity is sustainable.
- You are modelling a recapitalisation where leverage changes year by year.