When valuing a merger or acquisition using the discounted cash flow approach, free cash flows should be used when running the calculation as opposed to traditional cash flow.

Question

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Free cash flows are used in the discounted cash flow approach for valuing mergers or acquisitions because they represent the cash that is available to all investors (both equity and debt holders) after all operating expenses, taxes, and investments in working capital and fixed assets have been made, providing a more accurate measure of the company's available cash.

When Valuing a Merger or Acquisition Using the Discounted Cash