Which equation defines FCFE?

• A. EBIT*(1-T) + Depreciation - Capex - ΔNWC
• B. Net income - Net capex - ΔNWC + Net borrowings
• C. FCFF = Net income - Net debt
• D. Net income + Depreciation - Capex

Answer: (B)

Free cash flow to equity shows the cash that could be paid to shareholders after funding ongoing operations, capital investments, and any debt financing activities. Starting from net income and subtracting net capital expenditures and changes in net working capital, then adding net borrowings, captures the idea that the firm’s cash available to equityholders is reduced by investments in assets and by increases in working capital, but it is increased by funds raised from debt.

In this framing, net capex is often defined as capex minus depreciation (and disposals, if any). Subtracting net capex reflects the reinvestment needed in fixed assets, while the depreciation portion is effectively accounted for by this net capex term, aligning the expression with the typical FCFE formula: NI plus non-cash charges (depreciation) minus capex minus ΔNWC plus net borrowings. The other options either describe cash flow to the firm rather than to equity (FCFF), misstate FCFF as a relation to net income and net debt, or omit the working capital and financing components essential to FCFE.