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The Economics of Business ValuationTowards a Value Functional Approach$
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Patrick Anderson

Print publication date: 2013

Print ISBN-13: 9780804758307

Published to Stanford Scholarship Online: September 2013

DOI: 10.11126/stanford/9780804758307.001.0001

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Traditional Valuation Methods

Traditional Valuation Methods

Chapter:
(p.200) (p.201) 13 Traditional Valuation Methods
Source:
The Economics of Business Valuation
Author(s):

Patrick L. Anderson

Publisher:
Stanford University Press
DOI:10.11126/stanford/9780804758307.003.0013

This chapter describes the three traditional methods of valuing a business: the market approach, asset approach and income approach. For each, he describes a valuation principle and an underlying mathematical equation. The author describes the income or “discounted cash flow” approach is a workhorse of practical valuation. He observes the heavy reliance on subjective adjustments in actual use of this approach, which he argues supports the critique of the net present value rule and the weakness of this and other approaches in which subjective judgment, rather than actual use of a method, is the dominant factor. Finally, two of these traditional approaches are used to value three example firms, with the weaknesses in certain methods and the dominance of subjective adjustments made apparent.

Keywords:   market approach, asset approach, income approach, three traditional methods, business value, discounted cash flow, DCF, accounting identity, subjective adjustment

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