Contrast valuing a business by the free cash flow available to equity (FCFE) with valuing it by its free cash flow to the whole firm (FCFF)

Free cash flow to the firm is the cash available to all providers of capital, debt and equity, after operating costs, taxes and investment in fixed and working capital. Discounting it at the weighted average cost of capital gives the value of the firm, from which the market value of debt is subtracted to reach equity. Free cash flow to equity is what remains for common shareholders after interest, debt repayment and new borrowing; discounting it at the required return on equity values equity directly. FCFF is often preferred when FCFE is negative or leverage is set to change. The trap is mixing measures and rates: FCFE at the WACC, or FCFF at the cost of equity, gives a meaningless number.