Income A type of Valuation that is also known as Discounted cash flow method (DCF).

This
method focuses on evaluating a company based on future economic income.

This method of valuation focuses on Expected Cash flow that will be generated by the Firms
current transaction and economic position.

Due to its nature of estimating a firms value at future estimates it is known to have a benefit of
forward-looking which means investors and business owners can account for business growth
and affiliated risks.

There two ways to determine the value of the firm: asset-side valuation and equityside
valuation. Under equity-side valuation, Free Cash Flows to equity is used in calculating the
equity value. Further, it uses cost of equity (CAPM) in discounting the FCFE to get the value of
the firm. On the other hand, equity value can be calculated indirectly by deducting the debt from
enterprise value. This approach is called assetside valuation. Under asset-side valuation, it uses
Free cash flows (FCF) and discounts it using the WACC. The formulas are shown below:

Market-A type of Valuation method that focuses more on the market value of business by
comparing similar available prices of firms overall valuation or transactions.

This method of valuation assumes that due to the high correlation of companies in the same
industries prices for firms value is not far off therefore reflects current market conditions. As well
as performance is highly correlated to firms value

Market approach or market multiple method is a valuation method that computes the value of a
firm by comparing it with similar business having available price/value.

market approach uses the current price of comparable business to express the value of the firm.
According to IVS 105,

market approach is applicable under the following circumstances:

 “the subject asset or substantially similar assets are actively publicly traded; and/or
 the subject asset has recently been sold in a transaction appropriate for consideration
under the basis of value;
  there are frequent and/or recent observable transactions in substantially similar assets”

Due to its nature of considering valuation on same value of transaction this method incorporates
multiple factors such as industry trends, market condition, performance , as well as
comprehensive analysis of asset values.

Cost- Commonly, cost approach complements the information obtained from income and
market approach. This method can only be used is the other approaches are not applicable or
where the value of a firm is linked to specific assets such as property or equipment.

According to IVS 105, cost approach is applicable in the following circumstances: a)

 “participants would be able to recreate an asset with substantially the same utility as
the subject asset, without regulatory or legal restrictions, and the asset could be
recreated quickly enough that a participant would not be wimlling to pay a significant
premium for the ability to use the subject asset immediately;
 · the asset is not directly income-generating and the unique nature of the asset makes
using an income approach or market approach unfeasible; and/or
 the basis of value being used is fundamentally based on replacement cost, such as
replacement value”

The value of the firm under cost approach is derived by adjusting the book value of the
asset and liabilities using this formula:

three valuation methods used to estimate the value of an entity.