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CS Professional · Corporate Restructuring, Valuation and Insolvency · Valuation of Business and Assets for Corporate Restructuring

Veda Pharma Ltd is being acquired. Its independent valuer must value a patented drug formulation that is expected to generate royalty savings for the next several years. The valuer estimates the royalty Veda would otherwise pay to license a comparable patent from a third party and discounts those savings to present value. Which valuation approach is the valuer using?

The valuer is using the income approach through the relief-from-royalty method. The value of the patent is the present value of the royalty payments the owner avoids by owning the asset instead of licensing it, so it is not a cost or market approach.

  1. ACost approach based on replacement cost
  2. BIncome approach using the relief-from-royalty methodCorrect
  3. CMarket approach using comparable company multiples
  4. DAsset-based approach using book value

Explanation

Estimating the hypothetical royalty saved by owning the asset and discounting those savings is the relief-from-royalty method, which falls under the income approach. The cost approach looks at the cost to recreate the asset, and the market approach uses observed transaction prices, neither of which is used here.

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