CF model vs the DDM

CFA Level II Equities
#1

What is the difference between the DDM and the cash flow model? I got a question that basically said to evaluate an ownership share you’d us the cash flow model because ownership implied the ability to control the dividend schedule…but I guess I’m curiosu why the DDM would be wrong? Is the DDM only appropriate for like a normal, retail investor share?

thanks!

#2

By “the cash flow model” I assume that you mean FCFF or FCFE.

If you have control, then FCFF, FCFE, or DDM (if you’re going to be paying dividends) would be an appropriate valuation model.

When you don’t have control, FCFF and FCFE are less appropriate because you cannot control the dividends you receive; a DDM model (if the company pays dividends) is more appropriate. (However, note that I said that FCFF and FCFE are less appropriate, not that they’re _ inappropriate _.)

#3

Thanks! Sorry about those typos…

#4

My pleasure.