A PRACTICAL TUTORIAL ON THE FREE CASH FLOW TO FIRM AND FREE CASH FLOW TO EQUITY CALCULATIONS: THE ILLUSTRATIVE EXAMPLE OF IFRS FINANCIAL STATEMENTS

Abstract

Financial professionals regularly use cash flows, such as FCFF, FCFE, CCF etc. in various economic calculations. Ironically, academic literature and practical guidelines do not provide profound explanations on how to calculate cash flow scorrectly in line with the problem to be solved. Professionals often have doubts on the details of cash flow formulations in their financial spreadsheets. Expertise in financial accounting, deep understanding of theoretical principles underlying financial models and areful consideration are prerequisites to correct answers on tricky questions concerning cash flows. The paper provides step-by-step explanations on the algorithm of calculating FCFF, FCFE and CCF. The practical example using consolidates financial statements of Mining and Metallurgical Company Norilsk Nickel illustrates how to use the algorithm presented in this paper.