Free Cash Flow to Equity Valuation
Overview
the free cash flow to equity valuation is a method to value the equity of firm based discounting a measure of the firm's
earnings that belong to the equity holders, even if it is not being returned to the equity holders as dividends when it is earned.
This measure of sharholder owned earnings is calll free cash flow to the firm.
Free Cash Flow to Equity
There are different ways to calculate free cash flow.
Equity
According to the
present value methodology
{% Equity \, Value = \sum_t \frac{Cash \, Flow \, to \, Equity_t}{(1+r_e)^t} %}
Here the rate used to discount the equity cash flows is {% r_e %}, the cost of equity, or the expected return demanded by
equity holders. If the firm fails to earn the cost of equity on average for its shareholders, the price of the firm will
decline until the rate of return equals the demanded value.
CAPM
