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CA Final · Advanced Financial Management · Business Valuation

An analyst must choose a valuation approach for four unlisted companies. For which company is the asset-based (net asset value) approach most appropriate as the primary method?

The asset-based approach suits the holding company with mainly land and listed investments, because its value sits in identifiable assets that can be revalued to market prices. The other businesses derive value from people, contracts, growth or reputation, which a net asset value would largely miss.

  1. AA holding company whose wealth consists mainly of land parcels and listed investmentsCorrect
  2. BA software services firm whose value lies mainly in its skilled workforce and client contracts
  3. CA fast-growing consumer app start-up with negligible tangible assets
  4. DA consulting partnership whose income depends on the personal reputation of its partners

Explanation

The asset-based approach works best when value lies in identifiable tangible assets and investments that can be revalued to market or realisable amounts, as in a property or investment holding company. In the other three, value comes from people, contracts, growth or reputation, which do not appear on the balance sheet, so earnings or cash flow methods fit better.

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