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11 Questions

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Earnings Approach in Business Valuation

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Questions and Answers

What is the formula for calculating Business Value in the Earnings Approach?

Earnings × Capitalization Rate

Capitalization Rate × Earnings

Capitalization Rate ÷ Earnings

Earnings ÷ Capitalization Rate (correct)

What is the purpose of the Capitalization Rate in the Earnings Approach?

To determine the company's earnings

To forecast the company's cash flow

To represent the required rate of return for an investor (correct)

To calculate the company's expenses

What is the business value of Cecilia Company, given an annual earnings of P400,000 and a capitalization rate of 10%?

P3 Million

P5 Million

P4 Million (correct)

P2 Million

What is the expected annual cash flow of Cecilia Company?

P500,000 Signup and view all the answers

What is the average annual net income of SteadyTools Inc.?

PHP 500,000 Signup and view all the answers

What is the business value of SteadyTools Inc., given an average annual net income of PHP 500,000 and a required rate of return of 12%?

PHP 4,166,667 Signup and view all the answers

What is the purpose of the Earnings Approach in business valuation?

To estimate a firm's worth based on earnings forecasts Signup and view all the answers

What is the capitalization rate in the Earnings Approach?

The company's required rate of return Signup and view all the answers

What is the result of dividing the earnings by the capitalization rate in the Earnings Approach?

Business Value Signup and view all the answers

What is the Earnings Approach used for?

To estimate a firm's worth or value Signup and view all the answers

What is the name of the method used to estimate a firm's worth or value based on earnings forecasts?

Discounting Future Earnings Approach Signup and view all the answers