Income Approach To Value Capitalization Of Earnings

5 2 1 income method capitalization of earnings the most widely used method to compute the value of a business looks at the present value of anticipated future income or cash flow generated by the business.

Income approach to value capitalization of earnings. Use the seller s income statements to estimate income before depreciation interest and tax ibdit. It s calculated by dividing the net operating income by the capitalization. In theory your estimated value under the dcf method should approximate your estimated value under the capitalization of earnings method so long as your company s earnings are expected to grow at a constant rate. Adjust ibdit for potential increases in expenses after the business is purchased due to building equipment and fixtures furniture maintenance and replacements.

These methods are used to value a company based on the amount of income the company is expected to generate in the future. Income approach there are two income based approaches that are primarily used when valuing a business the capitalization of cash flow method and the discounted cash flow method. Capitalization of earnings is a key business valuation method under the income approach. Capitalization of earnings is a method of establishing the value of a company.

Process of calculating a company s value using the capitalized earnings method. The income approach is a real estate valuation method that uses the income the property generates to estimate fair value. Its application requires the choice of a single value economic benefit and a corresponding capitalization rate.