Equity - Free Cash Flow Valuation - Minority Perspective

Hello All,

Just a quick one regarding Minority Perspective. Can someone please explain the concept of this in terms of the DDM. I just want to be sure that I am interpreting this correctly.

Many Thanks in advance :slight_smile:

Interesting, this concept has been popping up a lot here lately.

An investor with a minority interest (small shareholder or non-controlling large investor) cannot influence the deployment of cash flow that might be available to common shareholders (FCFE). As such, the only access to a company’s value for the non-controlling investor is through the reciept of dividends based on the stated dividend policy, assuming dividends bear an understandable relation to value creation in the company. Thus the DDM model is used when taking this perspective, as it most closely matches the investor’s value interests. However, if the company has the potential to be an acquisition target, the minority investor may want to take a control perspective and use a cash flow based valuation model, as the stock price should include the price an aquirier (prospective controlling interest) would pay. In other words, the price should include a control premium.

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