Financial Management · Models for the valuation of shares

Business Valuation Basics and Valuation Approaches for ACCA FM

Updated 11 October 2026 · Fact-checked

Business valuation estimates what a company or its shares are worth. FM groups methods into three approaches: asset-based (what the business owns), income-based (the future dividends, earnings or cash flows it will produce) and market-based (what similar businesses trade for). You choose the approach that fits the purpose and the data given.

Understand Business Valuation Basics and Valuation Approaches

A share has a price on the market, but price is not always value. Valuation is the process of estimating what a share or a whole business is worth. You need it when there is no reliable market price, or when you doubt the price you see.

Typical reasons to value a business: a takeover or merger, a stock market flotation, selling a private company, a management buy-out, setting a share price for a rights issue, assessing a company for lending, and judging whether a quoted share is over- or underpriced. Each reason may favour a different method, because a buyer who wants control cares about different things than a small investor who wants dividends.

FM groups methods into three approaches. Asset-based methods value what the business owns, less what it owes. Examples are net book value, net realisable (break-up) value and replacement cost. Income-based methods value the future benefits the business will generate. Examples are the dividend valuation model and discounted cash flow. Market-based methods compare the business with similar quoted companies using multiples such as the P/E ratio and earnings yield.

No method gives the one true answer. Asset values ignore earning power and often goodwill. Income-based methods depend on forecasts and discount rates, which are uncertain. Market multiples depend on finding a truly comparable company, and a private company is usually less marketable, so its value is often discounted. Good answers give a value, then say how reliable it is.

In the exam, valuation questions appear in the objective sections and as part of a constructed response question. You may be asked to calculate a value, to explain why methods give different results, or to recommend a method for a stated purpose.

Key rules to remember

Net asset value (book): Net assets = Total assets − Total liabilities; Value per share = net assets ÷ number of ordinary shares. Remove preference shares from net assets first if they rank ahead of ordinary shares.
Net realisable value basis: Equity value = Sale proceeds of assets − Liabilities − Costs of closure; Used for a break-up or liquidation view. Usually gives the lowest value for a going concern.
Price/earnings (P/E) method: Value of equity = Earnings × P/E ratio; P/E is taken from a similar quoted company. Earnings are the profit after tax and after preference dividends.
Earnings yield method: Value of equity = Earnings ÷ Earnings yield; Earnings yield = 1 ÷ P/E. Same information as P/E, shown as a percentage.
Dividend valuation model (constant growth): P₀ = D₀(1 + g) ÷ (Ke − g); D₀ is the dividend just paid. Needs Ke > g. The price is ex-dividend.
Discounted cash flow value: Value = Σ [Cash flow in year t ÷ (1 + r)ᵗ]; Discount future free cash flows at a rate that reflects the risk. Include a terminal value if the business continues.

How to solve Business Valuation Basics and Valuation Approaches questions

Use this method for any question on valuation approaches, whether it asks you to calculate, compare or recommend.

1Identify the purpose of the valuation: takeover, sale, flotation, or checking a quoted price. This points to the right approach.
2List the data you are given. Balance sheet figures suggest asset-based. Dividends and growth suggest the dividend model. Earnings and a comparable P/E suggest market-based. Cash flows suggest DCF.
3Choose the approach that matches both purpose and data. If two fit, calculate both.
4Calculate carefully. Check which earnings figure to use, whether the dividend is D₀ or D₁, and whether preference shares must be removed first.
5Convert to the form asked: total equity value or value per share.
6Comment on reliability: say what the method ignores or assumes, in one or two sentences.
7If asked to recommend, state the method you prefer and the reason linked to the scenario, and say what you would use as a cross-check.

Quickest way: Match data to method in 20 seconds

When to use it: Use in objective test questions where you must pick a method, spot a limitation or do a simple calculation.

Look at the numbers given: assets, dividends, earnings or cash flows.
Pick the matching approach: assets → asset-based, dividends or cash flows → income-based, earnings and a P/E → market-based.
Do the one-line calculation: net assets ÷ shares, or earnings × P/E.
If the question asks for a weakness, use the standard one: asset-based ignores future earnings, income-based relies on forecasts, market-based relies on a comparable company.

Common mistakes in Business Valuation Basics and Valuation Approaches

Using book value of assets as if it were the market value of the business.
Net assets are easy to find on the statement of financial position.
Fix: Remember that book values are historic, often exclude internally generated goodwill and brands, and say so. Use revalued figures if the question gives them.
Forgetting to deduct preference shares before valuing ordinary shares.
Students treat all equity-type capital as ordinary equity.
Fix: Deduct preference shares and all liabilities from assets, or use earnings after preference dividends, before dividing by ordinary shares.
Applying a quoted company's P/E directly to a private company without comment.
The formula looks simple and the question gives one P/E.
Fix: Use it, but state that a private company's shares are harder to sell, so the P/E is often reduced. Follow any adjustment given in the question.
Using D₀ in the dividend model when the formula needs D₁.
Students rush and skip the growth step.
Fix: Multiply by (1 + g) unless the question already gives next year's dividend.
Saying one method is always best.
Students look for a single correct answer.
Fix: Tie your choice to the purpose and available data. A going-concern buyer cares about earnings. A liquidator cares about asset sale values.

Worked examples

Example 1

Delta Ltd has 2,00,000 ordinary shares in issue. Its statement of financial position shows total assets of ₹90,00,000 and total liabilities of ₹30,00,000. Land is carried at ₹10,00,000 but has a market value of ₹16,00,000. Other assets are fairly valued. Estimate the value per share on a revalued net asset basis.

Show the solution

Book net assets = ₹90,00,000 − ₹30,00,000 = ₹60,00,000.
Revaluation of land = ₹16,00,000 − ₹10,00,000 = ₹6,00,000 increase.
Revalued net assets = ₹60,00,000 + ₹6,00,000 = ₹66,00,000.
Value per share = ₹66,00,000 ÷ 2,00,000 = ₹33.

Answer: ₹33 per share. This ignores goodwill and future earnings, so it is a floor-type value for a profitable going concern.

Example 2

Zeta Ltd is unquoted. Its profit after tax is ₹24,00,000 and it has 6,00,000 ordinary shares. A similar quoted company has a P/E ratio of 12. Zeta's directors want to reduce the P/E by 25% because its shares are not marketable. Estimate the value of Zeta's equity and the value per share, and name the approach used.

Show the solution

Adjusted P/E = 12 × (1 − 0.25) = 9.
Equity value = earnings × P/E = ₹24,00,000 × 9 = ₹2,16,00,000.
Value per share = ₹2,16,00,000 ÷ 6,00,000 = ₹36.
The method uses a comparable company's multiple, so it is market-based.

Answer: Equity value ₹2,16,00,000, or ₹36 per share, using the market-based (P/E) approach. Its main weakness is that it depends on how comparable the quoted company really is.

Exam tips

Read the purpose of the valuation first. Examiners often reward the answer that links the method to the situation, such as break-up value for a company in difficulty.
In written parts, give one strength and one weakness for each method you mention. Short, specific points score better than long general ones.
In objective tests, check whether the question wants total equity value or value per share, and whether the figures are before or after preference dividends.
If a question says the methods give very different values, explain why: assets ignore earnings, and earnings-based methods ignore asset backing.
Show your working in constructed response answers even when the arithmetic is short, so method marks are available.

Practice questions from Models for the valuation of shares

Business Valuation Basics and Valuation Approaches in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Business Valuation Basics and Valuation Approaches: frequently asked questions

Why do we value shares if they already have a market price?

Many companies are not quoted, so no market price exists. Even for quoted shares, the price may not reflect true value, and a bidder in a takeover usually has to pay above the market price. Valuation helps you decide what to pay or accept.

What is the difference between asset-based and income-based valuation?

Asset-based valuation looks at what the business owns less what it owes, at a point in time. Income-based valuation looks at the future dividends, earnings or cash flows the business is expected to produce, discounted to present value. The first looks backwards at resources, the second looks forwards at returns.

How do I choose a share valuation method in ACCA FM?

Start with the purpose and the data in the question. Use asset-based methods for break-up or asset-rich businesses, the dividend model or DCF when dividends or cash flows are given, and P/E when a comparable company is given. State why you chose it and note its limits.

Which valuation method gives the highest value?

There is no fixed rule. A profitable business with few physical assets often has a higher income-based value than asset-based value. A business with valuable assets but weak earnings may show the reverse. Compare methods and explain the gap.