Thisisthecashflowavailabletobepaidoutasdividendsor
stock buybacks.
Thiscalculationcanbesimplifiedifweassumethatthenet
capitalexpendituresandworkingcapitalchangesarefinanced
using a fixed mix
15 ofdebtandequity.Ifδistheproportionofthenetcapital
expendituresandworkingcapitalchangesthatisraisedfrom
debtfinancing, theeffect oncash flowsto equityof these
items can be represented as follows:
Accordingly,thecashflowavailableforequityinvestorsafter
meeting capital expenditure and working capital needs,
assuming the book value of debt and equity mixture is
constant, is:
Notethat thenetdebtpaymentitem iseliminated,because
debtrepaymentsarefinancedwithnewdebtissuestokeepthe
debt ratio fixed. It is particularly useful to assume that a
specifiedproportionofnetcapitalexpendituresandworking
capital needs will be financed with debt if the target or
optimaldebtratioofthefirmisusedtoforecastthefreecash
flow to equity that will be available in future periods.
Wecanalsoestimatethefreecashflowtoequityfromthe
statementofcashflows.Tomaketheestimate,westartwith