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?

<p>P500,000 (C)</p> Signup and view all the answers

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

<p>PHP 500,000 (A)</p> 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%?

<p>PHP 4,166,667 (D)</p> Signup and view all the answers

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

<p>To estimate a firm's worth based on earnings forecasts (D)</p> Signup and view all the answers

What is the capitalization rate in the Earnings Approach?

<p>The company's required rate of return (C)</p> Signup and view all the answers

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

<p>Business Value (B)</p> Signup and view all the answers

What is the Earnings Approach used for?

<p>To estimate a firm's worth or value (A)</p> 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?

<p>Discounting Future Earnings Approach (B)</p> Signup and view all the answers

Flashcards

Business Value (Earnings Approach)

The estimated worth of a business based on its earnings, calculated by dividing earnings by the capitalization rate.

Capitalization Rate

The required rate of return for an investor in a business.

Earnings Approach

A business valuation method that estimates a company's worth based on predicted earnings.

Business Valuation

Estimating the worth of a business.

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Earnings

The profits a business generates.

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Cecilia Company's Value

P4,000,000 (calculated with P400,000 annual earnings & 10% cap rate).

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SteadyTools Inc.'s Value

PHP 4,166,667 (calculated from PHP 500,000 annual net income & 12% required return).

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Annual Net Income

Average profit achieved by a business in a year.

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SteadyTools Inc.'s Net Income

PHP 500,000.

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Required Rate of Return

The minimum return an investor expects on their investment.

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Discounting Future Earnings Approach

A method of valuing a company by considering the present value of all future earnings.

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