This calculates the Flow to Equity (FCFE) for each forecast period, being:
This formulation captures the total distributable cash to equity holders, reflecting both the operating cash generation and the impact of debt financing. It adjusts Free Cash Flow (FCFF) to include the effect of leverage and changes in debt position.
The Flow to Equity for each forecast year is then discounted using the Cost of Equity (CoE) as the discount rate. The terminal value is calculated using the Gordon Growth Model.
CoE = Cost of Equity
g = Terminal Year Growth Rate
t = Time Period
TY = Terminal Year
Unlike the WACC approach, which starts from Enterprise Value and subtracts Net Debt, the Flow to Equity method values the equity directly.