Which valuation approach is often used for minority shareholdings?

The dividends based approach is often used for valuing minority shareholdings because it focuses on the cash flows that the minority shareholder can expect to receive from the investment. Minority shareholdings generally do not provide control over the company’s operations or strategic decisions, making a valuation based on potential future cash flows, such as dividends, particularly relevant.

This approach assumes that the value of the shareholding is closely tied to the company’s ability to generate and distribute dividends, which is a primary benefit to minority shareholders. In situations where dividends are sporadic or nonexistent, this method may become less applicable, but when dividends are present, they provide tangible evidence of a company's performance and an indicator of the potential return on investment for a minority shareholder.

Hence, the dividends based approach is tailored to reflect the perspective of a minority investor, focusing specifically on the income that can be derived from the holdings rather than the larger operational considerations that might be relevant for controlling shareholders. This makes it a practical choice in valuing minority interests in various types of investments.