Which cash flow should be used in DCF when valuing the firm?

The appropriate cash flow to use in a Discounted Cash Flow (DCF) analysis for valuing the entire firm is Free Cash Flow to the Firm (FCFF). FCFF represents the cash generated by the company's operations that is available to all financing providers, including both equity and debt holders, before any interest payments are made. This makes FCFF the most comprehensive measure for firm valuation in a DCF model.

Using FCFF provides a clearer picture of the firm’s cash-generating capability, as it accounts for all operating cash flows and excludes the impacts of financial structures, such as debt. This is critical because the DCF method aims to capture the total value of the firm, which requires a metric that reflects the cash available after accounting for all necessary operational expenses but before financing costs.

In contrast, Free Cash Flow to Equity (FCFE) is more suitable for evaluating the value of equity specifically, as it focuses only on the cash flows available to equity shareholders after accounting for debt repayments. Net Cash Flow could be misleading because it may include non-operating cash movements that do not reflect the firm’s fundamental operational performance. Gross Revenue does not account for expenses, making it an incomplete metric for valuation purposes.

Therefore, choosing FCFF aligns with the