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There are several approaches used in business valuation:
One income approach is calculating the weighted average cost of capital, or WACC. It is the average cost of a unit of income for the company. It is calculated by using a weighted average of the cost of bonds, the after-tax yield to maturity, the required return on common stock, and preferred stock, if there is any.
The income approach also includes the capital asset pricing model, or CAPM. This expresses a required return on a company as a function of risk and a comparison of how risky the stock is compared to the risk of the market as a whole.
The asset-based approach is a method based on assets to determine the value of a business. This approach estimates the cost of replacing the total assets of the business with the same economic utility.
The truest way is the market approach, which tells us that the true value of a firm is what the market says it is. It is the current price of a share of common stock times the number of shares outstanding. The shares of common stock represent ownership, and in the market, price represents the true value of what each of the shares are worth.
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