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:

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The FCFF approach values the firm by discounting the present value of the FCFF by the firm's weighted average cost of capital (WACC). This approach takes into account both the cost of equity and the cost of debt, which are weighted by their respective proportions in the capital structure of the firm. Using the WACC as the discount rate reflects the opportunity cost of investing in the firm, considering the returns available to investors in the market for comparable risks. Discounting by the firm's cost of equity only would not capture the impact of debt on the firm's value, while discounting by the cost of debt or inflation rate would not consider the cost of equity financing.

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