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Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › FCF, FCF to Equity and Dividend capacity
Hi john
The above 3 words are used very much often. How do they differ?
Thanks in advance
Free cash flow is the net cash flow available for all lenders (debt + equity) which is essentially the earnings before interest but after tax, less any investment needed to maintain the operations.
Free cash flow to equity is the cash available for shareholders (so essentially the free cash flow less the interest).
Dividend capacity is normally the same as the free cash flow to equity – the most they could pay as dividend (even though obviously they do not normally pay all the available cash out as dividend).
Thanks John
You are welcome 🙂