Sensitivity and Scenario Risk Measures
Sensitivity Risk Measures Sensitivity analysis involves determining how changes in risk factors affect... Read More
The free cash flow valuation approach is preferred over the dividend discount model (DDM) because:
Question
Which of the following valuation models is most appropriate when valuing a company from a minority shareholder perspective?
- FCFE model.
- FCFF model.
- Dividend discount model.
Solution
The correct answer is C.
The dividend discount model is the most appropriate valuation model when valuing a company from a minority shareholders’ perspective.
A is incorrect. The FCFE model is appropriate when valuing a company from a majority shareholder’s perspective.
B is incorrect. FCFF is also be used to value the firm from a majority shareholder’s perspective.
Reading 24: Free Cash Flow Valuation
LOS 24 (f) Compare the FCFE model and dividend discount models.