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ACCA Applied Skills · Financial Management · Nature and purpose of the valuation of business and financial assets

Which of the following is the most appropriate description of the net asset basis of valuing a company's equity?

The net asset basis values equity as total assets less total liabilities, normally starting from the statement of financial position values. It is an asset-based method, unlike dividend, earnings or cash flow approaches, which value the business from future income or cash flows.

  1. ATotal assets less total liabilities, using values stated in the statement of financial positionCorrect
  2. BThe present value of expected future dividends discounted at the cost of equity
  3. CEarnings per share multiplied by the sector price/earnings ratio
  4. DFree cash flows to the firm discounted at the weighted average cost of capital

Explanation

The net asset basis values equity as assets minus liabilities, typically starting from carrying amounts (often adjusted to fair or realisable values). The dividend valuation model, P/E method and discounted free cash flow approach are income or cash flow-based methods, not asset-based.

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