Question

1. Discuss the difference between intrinsic value method and fair value method in accounting for stock option compensation (5pts). Which method do start-up companies prefer and why?

2.If both market approach and income approach are available for the valuation of a stock, which do you prefer as an investor and why?

Answer 1

1.

There is a whole lot of difference between intrinsic value and market value method in accounting for stock option compensation.

Although both the value methods are used to find the value of a stock.
Intrinsic value method is used to find the actual value price of the given stock.
The current value of assets is used to find the intrinsic value.
Investors always use intrinsic value method to find their investments to be worth of investing or not.

Market value method : unlike intrinsic value method, it is used to determine the value of the stock price listed on stock exchange.
It determines only the market value of the stock.

Startups always prefer intrinsic value methodbas a startups are not listed on stock exchange and also intrinsic value determined their current value.

2.

If both market approach and income approach are available for the valuation of a stock, the method which should be preferred by an investor should be income approach.

As market approach uses the market value to assign the business valuation and this may vary from time to time.
Whereas income approach is based on the incomes the company is earning and assigns the true value of any business, so investors always do preffer the income approach.