CVA Valuation Approaches and Methodologies Flashcards
7 cards from real Certified Valuation Analyst practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 CVA Valuation Approaches and Methodologies flashcards as text
Under the income approach, the capitalization of earnings method is most appropriate when a company's future earnings are expected to:
Answer: Grow at a stable, constant rate
Capitalization of earnings assumes a single, stable growth rate, making it suitable for companies with steady, predictable earnings.
The capitalization rate used in the income approach is best described as:
Answer: The discount rate minus the long-term growth rate
The capitalization rate equals the discount rate less the expected long-term sustainable growth rate.
In the discounted cash flow method, the terminal value typically represents:
Answer: The bulk of total enterprise value for a going concern
Terminal value usually accounts for a large portion of total value because it captures all cash flows beyond the explicit forecast period.
Which adjustment is commonly made to normalize earnings before applying an income approach?
Answer: Removing above-market owner compensation
Normalizing adjustments remove excess owner compensation to reflect a fair-market wage and true earning capacity.
The Gordon Growth Model is used in the income approach primarily to:
Answer: Calculate the terminal value of perpetual cash flows
The Gordon Growth Model capitalizes a perpetual stream of cash flows growing at a constant rate to compute terminal value.
When projecting cash flows, an analyst should ensure the growth rate used in perpetuity does not exceed:
Answer: The long-term growth rate of the overall economy
A perpetual growth rate above long-term economic growth is unrealistic because the company would eventually outgrow the economy.
A key limitation of the income approach is that it:
Answer: Relies heavily on the reliability of future projections
The income approach is only as reliable as the assumptions and forecasts that drive the projected cash flows.
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