Certified Valuation Analyst CVA Valuation Approaches and Methodologies 2

Question 1

Under the income approach, the capitalization of earnings method is most appropriate when a company's future earnings are expected to:

Accepted Answer

Grow at a stable, constant rate

Answer

Capitalization of earnings assumes a single, stable growth rate, making it suitable for companies with steady, predictable earnings.

Question 2

The capitalization rate used in the income approach is best described as:

Accepted Answer

The discount rate minus the long-term growth rate

Answer

The capitalization rate equals the discount rate less the expected long-term sustainable growth rate.

Question 3

In the discounted cash flow method, the terminal value typically represents:

Accepted Answer

The bulk of total enterprise value for a going concern

Answer

Terminal value usually accounts for a large portion of total value because it captures all cash flows beyond the explicit forecast period.

Question 4

Which adjustment is commonly made to normalize earnings before applying an income approach?

Accepted Answer

Removing above-market owner compensation

Answer

Normalizing adjustments remove excess owner compensation to reflect a fair-market wage and true earning capacity.

Question 5

The Gordon Growth Model is used in the income approach primarily to:

Accepted Answer

Calculate the terminal value of perpetual cash flows

Answer

The Gordon Growth Model capitalizes a perpetual stream of cash flows growing at a constant rate to compute terminal value.

Certified Valuation Analyst Practice Test