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CHAPTER 34: Overview and Conclusion > WHICH APPROACH SHOULD YOU USE?


The values that you 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 you as the analyst.

Asset or Business Characteristics

The approach you 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.

Marketability of Assets Liquidation valuation and replacement cost valuation are easiest to do for firms that have assets that are separable and marketable. (See Figure 34.2.) For instance, you can estimate the liquidation value for a real estate company because its properties can be sold individually, and you 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 like Proctor and Gamble. Its assets are not only intangible but difficult to separate out. For instance, you cannot separate the razor business easily from the shaving cream business, and brand name value is inherent in both businesses.


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