In the free cash flow from the firm (FCFF) approach, the total value of the firm, V_F, is computed as the present value of the FCFF using which of the following as a discount rate:

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The FCFF represents the cash flows available to all providers of capital, including debt and equity. Therefore, the appropriate discount rate should reflect the weighted average cost of capital (WACC), which takes into account the cost of debt and the cost of equity. This is because both debt and equity providers expect to be compensated for the risk they are taking in investing in the firm. Using the cost of equity (A) or the cost of debt (C) alone would not reflect the true cost of capital for the firm. Using the inflation rate (D) would not capture the risk associated with the firm's operations and therefore would not be an appropriate discount rate.

In the Free Cash Flow from the Firm (FCFF) Approach