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Basic Question 6 of 6
If a private pharmaceutical company owns an office building and also uses the building, analysts should ______ to normalize the earnings.
II. add a market rental charge for the use of the building
III. remove the related depreciation expense
I. do nothing as the building is being used by the company
II. add a market rental charge for the use of the building
III. remove the related depreciation expense
User Contributed Comments 4
| User | Comment |
|---|---|
| hatalim888 | the private pharmaceutical company uses the building, but still considered as non-operating asset of the company? |
| tbg091789 | I guess the building they own has nothing to do with the operations. |
| ashish100 | "normalize the earnings" |
| davidt876 | i would hope they also intend to do a corresponding balance sheet adjustment to hypothetically sell the building at its estimated fair market value.. otherwise you're just playing with numbers and screwing up the rules and relationships that make financial statement information meaningful. for example if the rent charge less depreciation has a negative effect on RI and you dont adjust the balance sheet then ROE is artificially low and will mess with your projected combined value calculations |
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Learning Outcome Statements
explain the income, market, and asset-based approaches to private company valuation and factors relevant to the selection of each approach;
explain cash flow estimation issues related to private companies and adjustments required to estimate normalized earnings;
CFA® 2025 Level II Curriculum, Volume 4, Module 25.