Earnings Normalization and Cash Flow E ...
Private company valuations may require adjustments to estimate the company's normalized earnings as... 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.