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Why do market based valuation approaches typically yield different valuations than intrinsic valuation approaches

Why do market based valuation approaches typically yield different valuations than intrinsic valuation approaches

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Market based valuation approches base the value of a business on its market price of similar assets. This is based on a standardized rate of discounting. Such approaches do not regard the future cash flows or prospects of the business.

The intrinsic value of a business is estimated based upon its cash flows, growth potential and risk. The DCF model is the most common where the expected future cash flows of the business are discounted to their present value based on a specific discount rate. Hence they take into account future performance and risk of the business.

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