- CFA Exams
- CFA Level I Exam
- Topic 5. Equity Valuation
- Learning Module 25. Private Company Valuation
- Subject 4. Valuation Approaches, Earnings Normalization and Cash Flow Estimation Issues
CFA Practice Question
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
Correct Answer: II and III
Since the building is a non-operating asset of the company, any revenues/expenses associated with the building should be removed to produce a more accurate estimate of the earnings.
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 |