Which cash flow should be used in DCF when valuing equity?

The correct choice for valuing equity in a Discounted Cash Flow (DCF) analysis is Free Cash Flow to Equity (FCFE). This metric represents the cash available to equity shareholders after accounting for all expenses, reinvestments, and debt repayments. It effectively reflects the cash that can be distributed to equity holders, which is crucial for determining the intrinsic value of a company's equity.

Using FCFE allows analysts to capture the cash flow specifically relevant to the shareholders, differentiating it from other measures that may not account for the entire capital structure. When valuing equity, it is important to focus on cash flows that will ultimately benefit the equity investors. FCFE is ideal for this purpose since it relates directly to the equity holders and addresses their specific claims on the firm's cash flows.

Other cash flow measures may provide important insights into a company’s overall financial health, but they aren't as direct in terms of equity valuation. Operating Cash Flow can be informative regarding the company's operational efficiency but doesn't include financing effects. Net Income provides an accounting-based measure that can be influenced by non-cash items, making it less reliable for cash-based valuation approaches. Free Cash Flow to the Firm (FCFF) accounts for both equity and debt holders, thereby diluting its relevance for