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

Under the capitalisation of earnings method, a valuer estimates maintainable future earnings of Rs 15 crore for Tarang Retail and uses a capitalisation rate of 20%. What is the implied value, and what multiple of earnings does it represent?

The value is Rs 75 crore, a multiple of 5 times earnings. Capitalisation divides maintainable earnings of Rs 15 crore by the 20% rate, and the implied multiple is the reciprocal of the rate. Multiplying by 20 instead of dividing would wrongly inflate the value.

  1. ARs 75 crore; 5 timesCorrect
  2. BRs 300 crore; 20 times
  3. CRs 3 crore; 0.2 times
  4. DRs 75 crore; 20 times

Explanation

Value = earnings / capitalisation rate = 15 / 0.20 = Rs 75 crore. The implied multiple is the reciprocal of the rate, 1 / 0.20 = 5 times. Multiplying earnings by 20 is the mistake behind Rs 300 crore.

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