Question #12
Reading: Reading 24 Private Company Valuation
PDF File: Reading 24 Private Company Valuation.pdf
Page: 8
Status: Correct
Correct Answer: A
Question
An analyst is valuing a small private firm that is still developing and has yet to generate any earnings. Which of the following best describes the approach that should be used?
Answer Choices:
A. An asset-based approach would be used
B. A market approach based on public comparables would be utilized
Explanation
The valuation approach used will depend on the firm's operations and its lifecycle stage.
Early in its life, a firm's future cash flows may be so uncertain that an asset-based
approach would be selected. The price multiples from large public firms should not be
used for a small private firm when using the market approach. Although a firm's
nonoperating assets are not crucial to the firm, they should be included in any valuation.