Certified Valuation Analyst Income Approach Methods 2

Question 1

Under the capitalization of earnings method, the capitalization rate is derived by:

Accepted Answer

Subtracting the long-term growth rate from the discount rate

Answer

The cap rate equals the discount rate minus the expected long-term sustainable growth rate.

Question 2

The discounted cash flow (DCF) method is most appropriate when:

Accepted Answer

Future cash flows are expected to vary significantly year to year

Answer

DCF suits businesses with uneven or changing projected cash flows because it discounts each period individually.

Question 3

In a DCF analysis, the terminal value represents:

Accepted Answer

The value of cash flows beyond the explicit forecast period

Answer

Terminal value captures all cash flows occurring after the discrete projection period.

Question 4

Which normalization adjustment is commonly applied to owner compensation in the income approach?

Accepted Answer

Adjusting above-market owner salary to a market rate

Answer

Excess owner compensation is normalized to a reasonable market-rate salary to reflect true earning capacity.

Question 5

The Gordon Growth Model is used in valuation primarily to calculate:

Accepted Answer

A terminal value assuming constant perpetual growth

Answer

The Gordon Growth Model estimates terminal value as a perpetuity growing at a constant rate.

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