{"id":18154,"date":"2021-07-20T19:26:22","date_gmt":"2021-07-20T19:26:22","guid":{"rendered":"https:\/\/analystprep.com\/study-notes\/?p=18154"},"modified":"2024-04-05T06:09:48","modified_gmt":"2024-04-05T06:09:48","slug":"ownership-perspective","status":"publish","type":"post","link":"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/ownership-perspective\/","title":{"rendered":"Ownership Perspective implicit in the FCFE Approach"},"content":{"rendered":"<p><iframe loading=\"lazy\" src=\"\/\/www.youtube.com\/embed\/A10ZXpSEZaM\" width=\"611\" height=\"343\" allowfullscreen=\"allowfullscreen\"><span data-mce-type=\"bookmark\" style=\"display: inline-block; width: 0px; overflow: hidden; line-height: 0;\" class=\"mce_SELRES_start\">\ufeff<\/span><\/iframe><\/p>\r\n\r\n<p>Under the free cash flow to equity (FCFE) approach, the ownership perspective is that of an acquirer who can change the firm\u2019s dividend policy. This approach takes a control perspective, which assumes immediate recognition of value.<\/p>\r\n<p>On the other hand, the discounted dividend approach takes the perspective of a minority shareholder who does not have control over a firm\u2019s dividend policy. It assumes that value may not be realized until the dividend policy reflects the firm\u2019s long-run profitability.<\/p>\r\n<p>The free cash flow valuation approach may be preferred over the dividend discount model when:<\/p>\r\n<ol style=\"list-style-type: lower-roman;\">\r\n\t<li>The company does not pay dividends.<\/li>\r\n\t<li>The company pays dividends, but it differs significantly from its ability to pay dividends.<\/li>\r\n\t<li>Free cash flows align with profitability within a satisfactory forecast period.<\/li>\r\n\t<li>\u00a0An investor that takes control has discretion over the use of free cash flow.<\/li>\r\n<\/ol>\r\n<blockquote>\r\n<h2>Question<\/h2>\r\n<p>Which of the following is <em>least likely <\/em>\u00a0a reason why analysts use free cash flow valuation approach over the dividend discount approach?<\/p>\r\n<ol style=\"list-style-type: upper-alpha;\">\r\n\t<li>The company does not pay dividends.<\/li>\r\n\t<li>The company is being valued from a majority interest ownership perspective.<\/li>\r\n\t<li>The free cash flow does not align with profitability within a satisfactory forecast period.<\/li>\r\n<\/ol>\r\n<h4>Solution<\/h4>\r\n<p><strong>The correct answer is C.<\/strong><\/p>\r\n<p>Analysts will use not use the free cash flow approach when the free cash flow does not align with profitability within a satisfactory forecast period.<\/p>\r\n<p><strong>A is incorrect. <\/strong>If a company does not pay dividends and it is not possible to forecast dividend payment in the future, analysts would use the free cash flow approach to value a company.<\/p>\r\n<p><strong>B is incorrect. <\/strong>If the ownership perspective is that of a majority interest, free cash flow approach is more appropriate for valuation as the investor that takes control of the firm has discretion over the use of free cash flow.\u00a0<\/p>\r\n<\/blockquote>\r\n<p>Reading 24: Free Cash Flow Valuation<\/p>\r\n<p><em>LOS 24 (b) Explain the ownership perspective implicit in the FCFE approach. <\/em><\/p>\r\n","protected":false},"excerpt":{"rendered":"<p>\ufeff Under the free cash flow to equity (FCFE) approach, the ownership perspective is that of an acquirer who can change the firm\u2019s dividend policy. This approach takes a control perspective, which assumes immediate recognition of value. On the other&#8230;<\/p>\n","protected":false},"author":5,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[102,401],"tags":[216,402,460,459],"class_list":["post-18154","post","type-post","status-publish","format-standard","hentry","category-cfa-level-2","category-equity-valuation","tag-cfa-level-2","tag-equity-valuation","tag-ownership-perspective","tag-reading-28-free-cash-flow-valuation","blog-post","no-post-thumbnail","animate"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v26.9 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Ownership Perspective implicit in the FCFE Approach - CFA, FRM, and Actuarial Exams Study Notes<\/title>\n<meta name=\"description\" content=\"Understand the reasons for using FCFE valuation and how it differs from the discounted dividend model in assessing a company&#039;s value.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/ownership-perspective\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Ownership Perspective implicit in the FCFE Approach - 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