Definition of Free Cash Flow
Free cash flows are referred to as the amount of cash that is left after all the payments and expenses. In terms of accounting the remainder of incomes after deducting all expenses is called the profit. But the cash flows are free from any non-cash items like depreciation and other non-cash incomes or expenses.
There are two types of free cash flows that are commonly used in corporate finance.
Free cash flows for Firm (FCFF):
Cash flows that are available to both Equity holders and debt holders. The formula for free cash flow for the firm is
FCFF=Cash Flows from Operations + (Interest Expense × (1−Tax Rate))−CAPEX
Free cash flows for Equity (FCFE):
Cash flows that are available after issuing any new debt. The formula for FCFE is:
FCFE=Cash from operations – Capex + Net debt issued