Contrast the FCFE model with dividend discount models

Both models value equity by discounting a flow to shareholders at the required return on equity, and both can be single-stage or multistage. The difference is the cash flow. Dividends are what shareholders actually receive and are set by the board; FCFE is the capacity to pay after investment and net borrowing. When a company pays out roughly its FCFE, the two models give similar values. When it pays far less, the dividend model suits a minority investor who receives only what is paid, while FCFE also shows what an owner who could change the payout might take out, so the choice depends on payout policy and how reliably each flow can be forecast. FCFE works for companies that pay no dividend, but it can be negative and volatile. The trap is concluding that a low-payout company is worth little without asking what happens to the cash it retains.