write and explain different approaches of valuation
Answers
Answer:
Essentially, there are three recognized approaches to value: The market approach. The income approach. The asset approach (also called the cost approach)
Answer:
Essentially, there are three recognized approaches to value:
The market approach
The income approach
The asset approach (also called the cost approach)
Explanation:
Market Approach Methods
The market approach is based on the principle of substitution. The fundamental basis of this approach is predicated on the theory that the fair market value of a closely-held company can be estimated based on the prices investors are paying for the stocks of similar, publicly traded (or private) companies. This is done through the use of ratios that relate the stock prices of the public companies to their earnings, cash flows, or other measures. By analyzing the financial statements of analogous companies and then comparing their performances with those of a subject company, the appraiser can judge what price ratios are appropriate to use in estimating the market value of the closely-held entity.
Methods under the market approach include:
Dividend-Paying Capacity Method
Guideline Merged & Acquired Company Method
Guideline Publicly-Traded Company Method
Transaction Database Method
Income Approach Methods
The income approach is based upon the economic principle of expectation. This approach assumes that the value of the business is equal to the present value of the economic income expected to be generated. Expected returns on an investment are discounted or capitalized at an appropriate rate of return to reflect investor risks and hazards. From a theoretical perspective, enterprise value is based either on historical earnings or future cash flows.
Methods under this approach include:
Capitalization of Excess Income Method
Capitalized Economic Income Method
Discounted Cash Flow Method
Asset Approach Methods
The asset approach may be applied when the benefits of operating a business do not outweigh the value that could be derived through the orderly liquidation of assets. Methods under this approach assume a controlling premise of value and include:
Net Asset Value Method
Adjusted Net Book Value Method
Capitalization of Excess Income Method (also an income approach method)
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