The capitalized earnings approach determines the value of a business by capitalizing its expected profits using:
A)the rate of return reflecting the risk level.
B)the prime interest rate.
C)the normal rate of return.
D)the prevailing rate of inflation.

Question

Quizplus · Accepted Answer

The capitalized earnings approach involves determining the value of a business by capitalizing its expected profits. This is done by dividing the expected profits by a capitalization rate, which reflects the risk level associated with the investment. Therefore, the rate of return reflecting the risk level (option A) is the most accurate choice for this approach, while options B, C, and D do not reflect the specific risk level of the business and are not relevant to the calculation.

The Capitalized Earnings Approach Determines the Value of a Business