Valuation Approaches: The Income Approach

The income approach is predicated on the notion that the value in an enterprise is the result of the benefit of collecting the ongoing earnings stream.  Similar to “time value of money,”  the analyst attempts to quantify the total future value of collecting future profits in today’s dollars.

Pro’s

  • Takes into account both the growth or decline of future benefit streams
  • Can fine tune adjustments for risk factors present in the company

 

Con’s

  • Is predicated on developing a “Discount Rate” for the subject company, which is highly complex
  • Discount Rate is also subjective.  As such “reasonable minds” can often disagree which is appropriate for the company
  • Projections for small companies can often be highly challenging, calling into question the veracity of results based on future looking models

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