3.2.3 Free cash flow

The free cash flow to equity of each firm is defined as

where  is the senior debt service at time  and  is the Cash Flow Available for Debt Service of company i at that time.

Whilst the FCFE provides an estimate for what is available to shareholders to distribute, however, distributing all the cash to shareholders is unlikely for an ongoing investment. As a result, we compute the retention rates using the historical payout profiles of infrastructure companies grouped by TICCS Business Risk, TICCS Corporate Structure, and in some cases, TICCS Industrial Super Class as follows:

where, i represents a company with a given classification segment by TICCS Business risk, Corporate Structure, and Industry, is the retention rate at age t for a company i with a given classification segment, is the final retention rate to be achieved in the classification segment of the company i, is the calibrated age at which the final retention rate to be achieved in the classification segment of the company i, is the age of company i at time t.

Thus, future equity payouts of each firm are simply written:

where is the stream of Free Cashflows to Equity for the period time t to time τ in the future, is the expected cash Retention Rates for the business from time t to time τ in the future.

The volatility of future equity payouts is the combination of the conditional variance of  and .