- CFA Exams
- CFA Level I Exam
- Topic 5. Equity Valuation
- Learning Module 25. Market-Based Valuation: Price and Enterprise Value Multiples
- Subject 2. Price to Earnings: Determining Earnings
CFA Practice Question
Normalized EPS is calculated to remove
A. cyclical effects.
B. non-recurring components of earnings.
C. differences in accounting methods.
Explanation: It is the estimated level of EPS that the business could be expected to achieve under mid-cyclical conditions.
User Contributed Comments 5
| User | Comment |
|---|---|
| REITboy | Don't normalized earnings also remove nonrecurring items? |
| REITboy | I guess not, according to the book... but they should... grumble... |
| ryanwalker | You remove nonrecurring items to get normalized EPS. The normalized EPS themselves remove the cyclical effects of EPS. |
| LoCo83 | Agreed. Would think that management compensation in excess of market norms or one time natural disaster effects would be 'normalized' out, even though it wouldn't show as cyclical |
| b25331 | EPS is after the removal of non-recurring items and the smoothing of EPS for business cycle effects and cyclicality, i.e. normalized EPS, is done either through historical average EPS method or average ROE method. |