Meaning and calculation
FCFE refers to equity holders rather than all sources of a firm’s financing. In a simple model, starting with net income after interest, the calculation moves to cash through depreciation, capital expenditure, non-cash working capital and net debt issuance. Additional classes of claims require separate adjustments.[94](#source-cv-cashflows)
Illustrative calculation
If illustrative net income is seventy-two million roubles, depreciation is twenty million, investment is thirty-five million, working-capital needs are ten million and net borrowing is five million, FCFE is fifty-two million roubles. Additional borrowing raises current cash flow but creates future obligations and is not free profit.
Discounting and limits
The cash flow is discounted at an agreed required return on equity.[93](#source-cv-rates) From the resulting equity valuation, the entire debt already accounted for must not be deducted again. FCFE differs from a dividend: distribution is constrained by decisions, contracts and applicable rules. The actual classification of cash transactions and the tax regime must be checked separately from the educational formula. Related guides: [discounted cash flow](/guides/discounted-cash-flow/) and [cash-flow statement](/guides/cash-flow-statement/).