The capitalized earnings approach determines the value of a business by capitalizing its expected profits using:
A) the interest rate that could be earned on a similar risk investment.
B) the prime interest rate.
C) the normal rate of return.
D) the prevailing return of inflation.

Question

Quizplus · Accepted Answer

The capitalized earnings approach calculates the present value of future earnings by dividing the expected annual earnings by a capitalization rate, which is typically the interest rate that could be earned on a similar risk investment. Therefore, choice A is the best answer.

The Capitalized Earnings Approach Determines the Value of a Business