I have really studied valuation because I use it in my profession and read just about any good book I could find about it, but I have these very simple questions that bugs me. It is:
1. When valuing a business I perform two DCFs using FCFE and FCFF respectively. These produce different values, but which one do I use?
2. What is the rule when buying a private company, do you pay for the equity or pay for the firm?
3. When deciding to buy a share in a listed entity do I do a DCF on FCFF or FCFE to determine the intrinsic value per share?
Thanks in advance

Question

I have really studied valuation because I use it in my profession and read just about any good book I could find about it, but I have these very simple questions that bugs me. It is:
1. When valuing a business I perform two DCFs using FCFE and FCFF respectively. These produce different values, but which one do I use?
2. What is the rule when buying a private company, do you pay for the equity or pay for the firm? 
3. When deciding to buy a share in a listed entity do I do a DCF on FCFF or FCFE to determine the intrinsic value per share?
Thanks in advance

anonymous · Answer

I personally like the FCFF. Analysts generally love EBITDA but it overstates marginality of the company!

WHY FCFF?
Because it accounts for fixed capital expenditure and allows room for interest adjustment. Interest paid is a financing ctivity, but under GAAP companies are allowed to use this a tax shield, essentially changing the value of earnings.

If the company has a capital structure is changing FCFF provides better valuation than FCFE because of net borrowings. FCFF does not discount back net borrowings whereas FCFE does which creates a void in the valuation.

FCFE is also prone to more accounting manipulations!

Hope this helps!