An Overview of Valuation Approaches
In previous chapters, we discussed elements that go into the determination of what value is being determined, including the standard of value and the premise of value. In this chapter, we introduce the three valuation approaches: asset-based or cost approach, income approach, and market approach.
Recognized Valuation Approaches
The three valuation approaches discussed at length in this book are outlined in Table 4.1.
|Asset-Based or Cost Approach||The asset-based approach is a general way of determining a value indication of a business, business ownership interest, or security using one or more methods based on the value of assets net of liabilities. Asset-based valuation methods include those methods that write up and write down the various tangible and/or intangible assets of an enterprise.|
|Income Approach||The income approach is a general way of determining a value indication of a business, business ownership interest, security, or intangible asset using one or more methods that convert expected future economic benefits into a single, present-value amount. Valuation methods under the income approach include those methods that provide for the direct capitalization of earnings estimates, as well as valuation methods calling for the discrete forecast of future benefits (earnings or cash flows) and then discounting those future benefits to the present at an appropriate discount rate.|