You're thinking of free cash flow to equity (FCFE), which would include the effect of net borrowing/repayment of debt. Instead, we typically calculate FCFF, which is computed before any effects of capital structure.

Hi WST Expert 1, thanks for your reply. So if we are doing FCFF calculation, with money for capex borrowed, then its really expected that we get mostly negative numbers for first few years that company is spending capex using borrowed money? and positive value just derived from terminal value?

Using DCF may not be the most appropriate valuation methodology if the company cannot sustain its required CapEx. Sounds like your company is in earlier stage growth mode, which DCF is not really applicable. Additionally, we would most definitely not recommend the FCFF formulas you referenced in ... Using DCF may not be the most appropriate valuation methodology if the company cannot sustain its required CapEx. Sounds like your company is in earlier stage growth mode, which DCF is not really applicable.

Additionally, we would most definitely not recommend the FCFF formulas you referenced in your initial post. We would advocate use of the accepted FCFF formula covered in our modeling and valuation courses. Read More