Certified Valuation Analyst Income Approach Methods

Question 1

What is the capitalization of earnings method?

Accepted Answer

Dividing a single representative earnings figure by a capitalization rate to determine value

Answer

Adding up all earnings over the company's history

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Multiplying revenue by the number of employees

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Comparing earnings to industry averages without calculation

Question 2

What is a discounted cash flow (DCF) analysis?

Accepted Answer

Projecting future cash flows and discounting them back to present value using a required rate of return

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Counting the cash currently in the company's bank accounts

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Comparing the company's cash flow to competitor averages

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Calculating the total revenue over the next 5 years

Question 3

What is the weighted average cost of capital (WACC)?

Accepted Answer

The blended cost of a company's debt and equity financing, weighted by their proportions in the capital structure

Answer

The average salary cost for all company employees

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The total cost of goods sold divided by revenue

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The interest rate on the company's largest loan

Question 4

What is the build-up method for determining a discount rate?

Accepted Answer

Adding risk premiums (risk-free rate + equity risk premium + size premium + company-specific risk) to build a total required return

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Constructing a building cost estimate

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Combining multiple valuation approaches into one

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Gradually increasing the company's value each year

Question 5

What is the difference between a discount rate and a capitalization rate?

Accepted Answer

A discount rate applies to future cash flows; a capitalization rate is the discount rate minus the expected long-term growth rate

Answer

They are identical concepts

Answer

A capitalization rate is always higher than a discount rate

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A discount rate applies to current earnings only

Question 6

Why are normalizing adjustments made to a company's financial statements in valuation?

Accepted Answer

To present the company's economic earning capacity by removing non-recurring, non-operating, and owner-specific items

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To make the financial statements look more favorable

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To comply with GAAP requirements

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To reduce the company's tax liability