Minority interest mainly refers to having an ownership stake in a particular company less than half of the total shares in terms of voting rights. Most of the time, the investors don't exercise the appropriate control over a company by the way of votes which leaves them little influence when it comes to thinking about the decision-making process. Various conditions come when minority interest valuation becomes necessary for a company or business entity.

Passive and active minority interest

There are mainly two types of minority interest. One is active and another one is passive. The passive interest is mainly sustained below twenty percent and the investors have little choice but to allow the maximum interest to make any major decisions of the company.

Active minority interest holds mainly 21% to 49% along with significant voting rights. These voting rights can influence the major decisions of the company. The voting rights can influence the election of the board members.

Valuation of the minority interest

When it comes to the valuation of a company, it needs thorough forecasting of the financial statements to understand the future trends using various parameters along with assumptions. Various agencies provide this service along with accurate forecasts. All of these forecasts are based on the current financial statement of the company.

Methods to carry out the computations

Constant growth

Various financial professionals use the constant growth model rarely. This is because, the assumption is that, it is hardly any decline o growth in the performance of any small-scale company.

Numerical growth

In this method, the previous figures are analyzed to assert the current trends. The model mainly predicts growth based on past trends. This is also called statistical growth and numerical growth mainly uses various important tools like series analysis, moving average, and regression-based analysis for all these types of things.

Ratio analysis

One of the questions that many people ask that, whether the minority interest is relevant when it comes to ratio analysis. The answer is yes, it is completely relevant. Some of the ratios that are mainly affected include return on equity, debt-to-equity ratio, and capital gearing ratio.

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