Skip to content

Strategic Performance Management and Business Valuation · Valuation of Assets and Liabilities

Valuation Approaches: Cost, Market and Income Explained

Updated 11 October 2026 · Fact-checked

The three valuation approaches are cost (what it would take to rebuild or replace the asset), market (what similar assets sell for) and income (the present value of future benefits). Pick the approach that fits the asset and the data available, compute each value, then reconcile with a reasoned conclusion.

Understand Valuation Approaches: Cost, Market and Income

Every valuation answers one question: what is this asset or business worth, for this purpose, on this date? There are three standard ways to answer it. Each looks at value from a different angle.

The cost approach asks what it would cost to create or replace the asset today. A buyer will not pay more than the cost of building an equivalent. For a business, the usual form is the adjusted net asset method. You restate every asset and liability to fair value, then take assets less liabilities. The book figures are only a starting point.

The market approach asks what the market pays for similar assets. You find comparables (similar companies or transactions), calculate a multiple such as price to earnings or EV to EBITDA, and apply it to your subject. It works well when there are good comparables and reliable data.

The income approach asks what future benefits the asset will produce. You forecast cash flows, choose a discount rate that reflects risk, and find the present value. The discounted cash flow (DCF) method is the standard form. It suits going concerns and assets that earn identifiable cash flows.

No approach is always right. A holding company with mostly investments suits net assets. A profitable listed-type business with peers suits multiples. A project or brand with forecastable cash flows suits DCF. In practice you often use two approaches and reconcile them.

Key rules to remember

Adjusted net asset value
Adjusted net assets = Fair value of assets − Fair value of liabilities (including contingent liabilities that are likely)
Add unrecorded assets such as brands if they can be valued. Value per share = adjusted net assets ÷ number of equity shares, after deducting preference capital if any.
Market multiple valuation
Value = Comparable multiple × Subject's metric (e.g. P/E × EPS, or EV/EBITDA × EBITDA)
With an EV multiple you get enterprise value. Deduct net debt to reach equity value.
Present value of a cash flow
PV = CF ÷ (1 + r)^n
r is the discount rate and n the year. Discount each year's cash flow separately.
Terminal value (constant growth)
TV at end of year n = CFₙ × (1 + g) ÷ (r − g)
Valid only when r > g. Discount TV back using the year-n factor.
Enterprise to equity value
Equity value = Enterprise value − Debt + Cash and surplus assets
Use FCFF discounted at WACC to get enterprise value.

How to solve Valuation Approaches: Cost, Market and Income questions

Use this sequence for any question on valuation approaches, whether it asks you to compute, choose or compare.

  1. 1Note the purpose, the date and the premise (going concern or liquidation). These decide which approach fits.
  2. 2List the data given. Balance sheet items point to cost, peer multiples to market, forecast cash flows to income.
  3. 3Choose the approach and state in one line why it suits the asset.
  4. 4Compute step by step. For net assets, restate each item to fair value first. For multiples, check the metric matches the multiple. For DCF, discount each year and add terminal value.
  5. 5Convert to the required output: enterprise value to equity value, or total value to value per share.
  6. 6Cross-check with a second approach if data allows, and comment on any gap.
  7. 7Write a clear conclusion with the value and the key assumptions.

Quickest way: Data-first approach selection

When to use it: Use when the question gives limited time and asks for one value or a choice of approach.

  1. Scan the data table. Whatever is supplied is the intended approach.
  2. Write the one-line formula for that approach before any numbers.
  3. Compute in a tidy table so marks are earned even if one figure slips.
  4. Finish with the equity bridge or per-share step. This is where most marks are lost.
  5. Add a one-line reason why the other approaches were not used.

Common mistakes in Valuation Approaches: Cost, Market and Income

  • Using book values in the adjusted net asset method.

    Students copy the balance sheet and forget the word 'adjusted'.

    Fix: Restate every asset and liability to fair value first. Add unrecorded items and remove assets or liabilities that do not exist.

  • Applying an EV multiple and stopping there.

    The multiple gives a neat number and the bridge feels optional.

    Fix: Always subtract debt and add cash to reach equity value before dividing by shares.

  • Using a terminal growth rate equal to or above the discount rate.

    Students plug in numbers without checking the formula's condition.

    Fix: Check r > g. Keep g at a sustainable long-run rate.

  • Discounting terminal value by one year too few or too many.

    Confusion over which year the terminal value belongs to.

    Fix: TV computed from year n+1 cash flow sits at the end of year n. Discount it with the year-n factor.

  • Choosing comparables that are not truly similar.

    Students use any company in the same broad sector.

    Fix: Compare on size, growth, risk and business model. Say what adjustments you would make.

  • Presenting a single approach with no justification.

    Students focus on calculation and treat choice as an afterthought.

    Fix: Write a line on purpose, data and premise. Case-style questions reward the reasoning.

Worked examples

Example 1

Meridian Traders Ltd has 1,00,000 equity shares. Book values: fixed assets ₹40,00,000 (fair value ₹55,00,000), inventory ₹10,00,000 (fair value ₹9,00,000), receivables ₹8,00,000 (₹1,00,000 of this is irrecoverable), cash ₹2,00,000, liabilities ₹12,00,000. A pending lawsuit is likely to cost ₹2,00,000 and is not recorded. Find the adjusted net asset value per share.

Show the solution
  1. Fair value of fixed assets = ₹55,00,000.
  2. Inventory = ₹9,00,000.
  3. Receivables = ₹8,00,000 − ₹1,00,000 = ₹7,00,000.
  4. Cash = ₹2,00,000.
  5. Total fair value of assets = 55,00,000 + 9,00,000 + 7,00,000 + 2,00,000 = ₹73,00,000.
  6. Liabilities = recorded ₹12,00,000 + lawsuit ₹2,00,000 = ₹14,00,000.
  7. Adjusted net assets = 73,00,000 − 14,00,000 = ₹59,00,000.
  8. Value per share = 59,00,000 ÷ 1,00,000 = ₹59.

Answer: Adjusted net asset value is ₹59,00,000, or ₹59 per share.

Example 2

Kaveri Foods Ltd has EBITDA of ₹8,00,00,000. Listed peers trade at an average EV/EBITDA of 9 times. Kaveri has debt of ₹20,00,00,000 and cash of ₹4,00,00,000, and 2,00,00,000 equity shares. Using the market approach, find the equity value per share. Then state one reason for caution.

Show the solution
  1. Enterprise value = 9 × ₹8,00,00,000 = ₹72,00,00,000.
  2. Net debt = 20,00,00,000 − 4,00,00,000 = ₹16,00,00,000.
  3. Equity value = 72,00,00,000 − 16,00,00,000 = ₹56,00,00,000.
  4. Value per share = 56,00,00,000 ÷ 2,00,00,000 = ₹28.
  5. Caution: peers may differ in size, growth and risk, so the multiple may need adjusting. A cross-check with DCF would add support.

Answer: Equity value is ₹56,00,00,000, or ₹28 per share, subject to the quality of the comparables.

Exam tips

  • Read the data first. Questions usually supply only what the intended approach needs.
  • Show the equity bridge (EV less debt plus cash) on its own line. Examiners look for it.
  • In MCQs, check the premise: liquidation points to net realisable asset values, going concern to income or market.
  • For choose-and-justify questions, give purpose, data availability and asset type in two or three crisp lines.
  • Do not forget unrecorded liabilities and assets in adjusted net asset questions. They are common traps.

Practice questions from Valuation of Assets and Liabilities

Valuation Approaches: Cost, Market and Income in other exams

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

Valuation Approaches: Cost, Market and Income: frequently asked questions

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

Asset-based valuation adds up the fair value of what the business owns and deducts what it owes. Income-based valuation discounts the future cash flows the business is expected to generate. Asset-based suits holding or loss-making businesses, and income-based suits going concerns with forecastable earnings.

When should I use the cost approach?

Use it when the asset has little earning history, when comparables are scarce, or when the business is mostly assets such as an investment holding company. It is also the base for a liquidation premise, using realisable values.

Can I use more than one approach in the same answer?

Yes, and it is often better. Compute under each suitable approach, then reconcile and explain which value you rely on and why. Weights, if used, must be justified.

Is the adjusted net asset method the same as book value?

No. Book value uses recorded accounting figures. The adjusted method restates assets and liabilities to fair value and includes unrecorded items, so it usually differs from book value.