Control perspective in valuation

Reading 33;

There are 3 valuation approaches - DDM, FCFE, Residual income!

  1. DDM One case where dividend approach is better is the noncontrolling perspective! I do not get it? “An investor purchasing a small ownership share does not have the ability to meaningfully influence the timing or magnitude of the distribution of the company’s cash to shareholders” 2) FCFE - And FCFE is appropriate when the investor takes a control perspective… The ability to influence the distribution and application of a firm’s free cash flow makes these models more pertinent to a firm’s controlling shareholders. Can anyone throw light and explain in simple terms how ownership can dictate the use? How come the ability to influence the distribution of dividend not make the DDM also an appropriate choice for valuation?

Because you can change rates of reinvestment at will, away from what is fundamentally sound.

Ok! I think I got it. It means that being a non-owner, whatever is available to me is the dividend as per the dividend policy. Being minority, I cannot influence the dividend payout ratio or the policy. hence, i should value the worth of my holding through the only available resource, which is the dividend. Aight Mr Smarty?

Pretty close, but not exactly.

FCFE and DDM valuations should converge, but only if the dividend policy by the owners correctly reflects the underlying fundamentals, and is predictable. In other words, the dividends expected should match the FCFE on the long term on a smoothed out basis. Note that DDM should include share repurchases, so you need to adjust dividends for such, if any.

It should not make a difference whether you value the whole equity portion of the company, then divide by the number of shares, or value the share directly by its proceeds.