LIMITATIONS IN THE USE OF INCOME APPROACH TO COST VALUATION OF A COMPANY

Abstract

The deteriorating economic situation in Ukraine, high inflation, valuation of a company and its assets is complicated. Multiple occasions of the need to assess the company necessitate right choice of the approach to its valuation. The purpose of the article consists in the synthesis and analysis of existing theoretical and applied aspects of the application of income approach to valuation of the company to determine advantages and disadvantages of its use in current economic conditions in Ukraine. In difficult economic situation of Ukrainian economy, stock market immaturity, lack of public information about purchases and sales of companies the question of the optimal choice of approach to the assessment of company value that would have a high level of reliability is raised. As a result of theoretical analysis of the essence of income approach to company valuation it is stated that the value of the company according to this approach is the determination of the present value of future earnings of the company on a retrospective basis in relation to the risks that will bring further economic activity of the company, or the income that will be obtained if the company will be sold. The research of information sources needed for the assessment by income approach allows to conclude that on the basis of public information on macroeconomic indicators of the development of the country, the region, the industry it is difficult to determine the value of the company with high accuracy. The analysis of the main methods of assessment of company value according to income approach allows to formulate the main advantages, disadvantages and limitations in applying the method of direct capitalization and the method of discounted cash flow. It is determined that for high reliability of the forecast of future business income a relative stability of company activity and the environment in which it operates are necessary. In the conditions of underdevelopment of Ukrainian stock market, the absence of public information about the sale and purchase market, mergers and acquisitions, the instability of the overall macroeconomic situation in the country using income approach is not appropriate. A further area of research is to determine the optimal approach and methods that can help to determine the value of the company with high reliability on the basis of limited public information and significant fluctuations in macroeconomic development of the country.