Approaches to Corporate Valuation

There are three main approaches to corporate valuation:

1. Asset-based approach
2. Income approach
3. Market approach

Asset-based approach

The asset-based approach values a business based on the fair market value of its assets. This approach is most appropriate for businesses that have a high proportion of tangible assets, such as manufacturing companies. The asset-based approach can be used to value a business as a going concern or as a liquidation.

Income approach

The income approach values a business based on its ability to generate future income. This approach is most appropriate for businesses that have a high proportion of intangible assets, such as technology companies. The income approach can be used to value a business using a variety of methods, such as discounted cash flow (DCF) analysis, capitalization of earnings, and dividend discount model.

Market approach

The market approach values a business based on the prices of similar businesses that have been bought or sold recently. This approach is most appropriate for businesses that are traded on public markets. The market approach can be used to value a business using a variety of methods, such as the guideline public company method and the transaction multiple method.

Multiple Choice Questions (MCQs)

1. Which of the following approaches to corporate valuation is most appropriate for businesses that have a high proportion of tangible assets?
   • Asset-based approach
   • Income approach
   • Market approach
   • Answer: The asset-based approach is most appropriate for businesses that have a high proportion of tangible assets.
2. Which of the following approaches to corporate valuation is most appropriate for businesses that have a high proportion of intangible assets?
   • Asset-based approach
   • Income approach
   • Market approach
   • Answer: The income approach is most appropriate for businesses that have a high proportion of intangible assets.
3. Which of the following methods is used in the income approach to corporate valuation?
   • Discounted cash flow (DCF) analysis
   • Capitalization of earnings
   • Dividend discount model
   • Answer: All of the above methods are used in the income approach to corporate valuation.
4. Which of the following methods is used in the market approach to corporate valuation?
   • Guideline public company method
   • Transaction multiple method
   • Answer: Both the guideline public company method and the transaction multiple method are used in the market approach to corporate valuation.

Answers

1. Asset-based approach
2. Income approach
3. All of the above methods
4. Both the guideline public company method and the transaction multiple method