This paper offers outlines of a new model for valuing income-producing illiquid assets (stocks of private companies in industries not quoted on public exchanges, intangible assets, income-producing specialized real property, etc.) where the valuation is for purposes of determining values-in-exchange (as opposed to investment value). In exploring the principle of discounting for such assets, this paper makes a departure from equilibrium `broad-market' thinking characteristic of Capital Asset Pricing Model (CAPM) - like models (which seem to be mostly applicable in their field of valuing liquid assets, but the transference of which to valuing assets which are involved only in sporadic exchanges is called into question) and offers a formalization of the new principle of `transaction equilibrium' (which was inspired by the general definition of market value contained in the International Valuation Standards).

Proceeding from this principle, it is possible to view the rationale for DCF-based exchange valuations at a new angle and offer alternative justifications for compressing general DCF format into particular income capitalization techniques (such as the Gordon Model, Inwood framework, etc). Therefore, this paper offers alternative derivations of those income capitalization techniques. It also explains the formulating discounting procedure which is seen to be more befitting for cases of valuing illiquid assets in "transaction equilibrium" conditions. Besides, general DCF framework is a multi-period framework which sits badly with one-period discounting techniques (such as CAPM or APT corollaries) which are having wide currency in practical valuations. The proposed discounting technique is explicitly multi-period and has investment behavioral features of presumed buyers/sellers transacting in illiquid assets for its inputs.

This paper explains the basic processes of reasoning behind the `market value' in cases of valuing income-producing illiquid assets (generally being assets for which no comparable transactions evidence (in terms of prices paid) is available, thus obviating the possibility of applying the sales comparison approach to valuation) for exchange transactions, and how market participants within the framework of income approach equitably establish it.

Some clarifications in our understanding of certain valuation notions are needed for these purposes, not least because the issue of valuing illiquid assets is seldom addressed on theoretical level, and, whenever it is addressed, the prevailing wisdom is grounded in the attempt to borrow certain valuation concepts from the field of Modern Portfolio Theory (MPT) and investment valuation theory (i.e., CAPM, APT and other expedients of pricing in efficientor, at least, activemarkets, such as are described in Damodaran 2002) and `adjust' them in some way which is often contrary to the founding assumptions of the MPT. Thus, many judgments rendered `by analogy' with pricing occurring in active markets came to dominate the adjusted and build-up CAPM agenda for deriving discount rates for illiquid assets (Mercer, 2004).

Applied Finance Journal, Illiquid Assets, Capital Asset Pricing Model, CAPM, Modern Portfolio Theory, MPT, Statistical Analysis, International Valuation Standards, Macroeconomics, Mortgage Lending Value, Capitalization Methodologies, Sinking Fund Factor, Risk-Management, International Accounting Community, Financial Economics.