Total Cash Flow vs. Free Cash Flow to the Firm in DCF
In the DCF analysis, why do we use annual Free Cash Flow to the Firm (which only partially accounts for Investing activities and omits financing activities) to find the Enterprise Value, rather than total annual Cash Flow (Operating+Investing+Financing)?
You only want to account for items that impact cash on a recurring basis. Cash impacts from operations activities (net working capital) and CapEx (cash from investing) are usually the only items that can be projected on a forward basis.
You can include the impact on cash from financing activities if you know the firm you are valuing pays out a quarterly dividend, for example. However, in most cases, operating assets/liabilities (net working capital) and CapEx are the only items that occur every year and in which the company spends cash on replenishing.
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