Chapter 23

Weighting of Approaches


Normally, holding companies are valued by the asset approach and operating companies are valued by the income or market approach. However, some companies may have characteristics of both a holding company and an operating company. In such cases, some weight may be given to the asset approach and some to the income and/or market approach.

If a company's assets can be divided between operating assets and nonoperating assets, the company's operating assets can be valued by the income and/or market approach, and the nonoperating assets by the asset approach. (See Chapter 11.)

When more than one approach is to be accorded some weight, there is a difference of opinion as to whether the weighting should be mathematical (assigning a percentage to each approach to be accorded some weight) or subjective.

Theory and Practice

In theory, the discounted cash flow method within the income approach is the most correct method. There is virtually unanimous agreement that a company is worth the future benefits it will produce for its owners (benefits preferably measured by net cash flows or some other measure of earnings), discounted back to a present value by a discount rate that reflects the risk of achieving the benefits in the amounts and at the times expected. A typical statement of this theory is as follows:

[T]he value of an asset is the present value of its expected returns. Specifically, you expect an asset to provide a stream of returns during ...

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