Based on the premise of the capitalization of earnings method, if a business for sale is low risk with good growth potential, the value will be based on which of the following?
A)A high capitalization rate and a low earnings multiplier.
B)A low capitalization rate and a high earnings multiplier.
C)A high capitalization rate and a high earnings multiplier.
D)A low capitalization rate and a low earnings multiplier.

Question

Quizplus · Accepted Answer

The capitalization of earnings method values a business by dividing its earnings by the capitalization rate. A low risk with good growth potential business would have a low capitalization rate and a high earnings multiplier. Therefore, the value would be based on a low capitalization rate and a high earnings multiplier (option B).

Based on the Premise of the Capitalization of Earnings Method