Topic Test Equity - Wolff Question 3. Why option C " an income approach is inappropriate when the company is in the development stage" is not correct? In the development stage, company free cash flow is not predictable and stable. Therefore, income approach is not appropriate, right?
Companies in the development stage don’t tend to have either positive income or positive free cash flow, and whatever they do have is likely to be more volatile and less predictable than, say, a more mature company. All those things make a valuation via the income approach a relatively difficult thing to do for young companies versus simply taking a cost approach. Hope that helps!
Yes. I agree with you. But the answer is not C. C is wrong.
There are only 3 methods: Asset Based/Market/Income approach. We can rule out Market approach for its used for mature firms.
Asset Based approach is NOT used for going concerns.
We are left with income approach which has 3 sub methods:
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FCF: used for firms with unstable growth (such as development stage growth firms)
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Capitalized cf: stable growth firms
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Excess earnings: when firm has significant intangibles
Hope this helps. This is how i remember it.
A Valuation guy talking 
On question 4 the answer says that a lack of marketability discount should be applied when perspective is of controlling interest. On pg 553 of the equity text it says that DLOM is typically used for minority interests. How are we supposed to know when to apply it?
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