DDM vs FCF Model

Could use some clarification. Schweser state that DDM assumes the perspective of a minority interest, while FCF assumes that of a controlling interest, but they don’t say much more than that. What does it mean exactly? I keep getting stuck in the mindset that a firm should be worth whatever its worth, regardless of if you’re a minority or controlling stakeholder.

If you’re a controlling stakeholder, you have the authority to change the dividend policy. You can choose to payout whatever percentage you feel is right to your shareholders.

In different countries, there may be difference in the tax rates applicable to dividends and capital gains. Also, you have to see how your dividend policy is going to affect the sentiment in the market. For example - the market may perceive an increase in dividend as a sign of increased cash flows in the future. Similarly, decrease in dividend may mean that the company is planning on some capex which would probably increase its growth rate.

As a controlling stakeholder, you need to take in mind the above factors before deciding upon a dividend policy. It may lead to difference in the value of firm (due to different tax structures on cap. gains and dividends).

As a minority stakeholder, you do not have the above liberties and would have to agree to whatever the board has decided to do.

So if you have controlling interest, it is better to choose the FCF model since you could choose what you want to do with your cash flows. And that your decisions can affect the value of the firm.