Which of the Following Explains the Rationale for Using "Normalized

question 19

Multiple Choice

Which of the following explains the rationale for using "normalized" earnings under the excess-earnings valuation approach?

• A) Historic asset values are the best reflection of the assets' value in use.
• B) The company's future earnings should always be higher than the past earnings.
• C) The past often provides useful information about the future; past earnings are a good starting point.
• D) Normalized earnings are not used under the excess-earnings valuation approach.

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Definitions:

Risk Neutral

An investor who finds the level of risk irrelevant and considers only the expected return of risk prospects.

Expected Return

The weighted average of all possible returns for a given investment, based on probabilities of outcomes.

Standard Deviation

Measures the amount of variability or dispersion around an average, reflecting the risk associated with a variable’s stability in financial contexts.