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Basic Question 4 of 4
The key problem with the excess earnings method is that there are too many subjective variables for the analyst to estimate. These estimated variables include:
II. The "normal" tangible assets of the company.
III. the "normal" return on tangible assets for the company.
IV. the capitalization rate for the excess earnings component of the company.
I. The "normalized" income of the company.
II. The "normal" tangible assets of the company.
III. the "normal" return on tangible assets for the company.
IV. the capitalization rate for the excess earnings component of the company.
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I am happy to say that I passed! Your study notes certainly helped prepare me for what was the most difficult exam I had ever taken.
Andrea Schildbach
Learning Outcome Statements
calculate the value of a private company using free cash flow, capitalized cash flow, and/or excess earnings methods;
explain factors that require adjustment when estimating the discount rate for private companies;
compare models used to estimate the required rate of return to private company equity (for example, the CAPM, the expanded CAPM, and the build-up approach);
CFA® 2025 Level II Curriculum, Volume 4, Module 25.