Skip to content

CMA Final · Strategic Performance Management and Business Valuation · Business Valuation Methods and Approaches

In business valuation, the 'excess earnings method' (also called the capitalisation of super-profits approach) values goodwill primarily by capitalising which quantity?

The excess earnings method capitalises the super-profit, meaning the profit earned above a normal return on net tangible assets. That excess is attributed to goodwill, because tangible assets alone would have earned only the normal return.

  1. ATotal profit after tax of the business
  2. BProfit earned above a normal return on net tangible assetsCorrect
  3. CNet tangible assets less outside liabilities
  4. DAverage dividends paid in the last three years

Explanation

The excess earnings method first computes a normal return on the tangible assets employed. Profit above that normal return is super-profit, which is then capitalised to arrive at goodwill. Capitalising total profit would ignore the return that tangible assets would earn anyway.

Did you get it right without looking?

One question tells you little. A timed set on Business Valuation Methods and Approaches shows your real accuracy, how long you take and where you lose marks.

Practise Business Valuation Methods and ApproachesFree diagnostic mock

More Business Valuation Methods and Approaches questions