Which of the following approaches to private company valuation uses discounted cash flow analysis?
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The income approach values a firm as the present value of its future income. The asset-based approach values a firm as its assets minus liabilities. The market approach values a firm using the price-multiples from the sales of comparable assets.
An analyst is valuing a firm’s equity using the price-to-book-value ratio of similar firms. Which of the following is the most likely valuation approach the analyst will use?
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The market approach values a firm using the price-multiples such as the price-to-book-value ratio and price-earnings ratio of comparable assets. The income approach values a firm as the present value of its future income. The asset-based approach values a firm as its assets minus liabilities.
An analyst is valuing a small private firm that is still developing and has yet to generate any earnings. Which of the following best describes the approach that should be used?
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The valuation approach used will depend on the firm’s operations and its lifecycle stage. Early in its life, a firm’s future cash flows may be so uncertain that an asset-based approach would be selected. The price multiples from large public firms should not be used for a small private firm when using the market approach. Although a firm’s nonoperating assets are not crucial to the firm, they should be included in any valuation.
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