18.2. WHICH APPROACH SHOULD WE USE?

The values that we obtain from the four approaches can be very different, and deciding which one to use can be a critical step. This judgment, however, will depend on several factors, some of which relate to the business being valued but many of which relate to us, as the analysts.

18.2.1. Asset or Business Characteristics

The approach that we use to value a business will depend on how marketable its assets are, whether it generates cash flows, and how unique it is in terms of its operations.

18.2.1.1. Marketability of Assets

Liquidation valuation and replacement cost valuation are easiest to do for firms that have assets that are separable and marketable. For instance, we can estimate the liquidation value for a real estate company because its properties can be sold individually and we can estimate the value of each property easily. The same can be said about a closed-end mutual fund. At the other extreme, consider a brand-name consumer product company like Gillette. Its assets are not only intangible but difficult to separate. For instance, we cannot separate the razor business easily from the shaving cream business, and brand name value is inherent in both businesses.

Figure 18.2. Asset Marketability and Valuation Approaches

We can also use this same analysis to see why the liquidation or replacement cost value of a high-growth business ...

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