The Capitalized Earnings Approach Determines the Value of a Business

question 19

Multiple Choice

The capitalized earnings approach determines the value of a business by capitalizing its expected profits using:

• A) the interest rate that could be earned on a similar risk investment.
• B) the prime interest rate.
• C) the normal rate of return.
• D) the prevailing return of inflation.

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Definitions:

Variable Manuf. Overhead

Costs that vary with the level of production output and are related to the manufacturing process but cannot be directly traced to individual units produced.

Direct Materials

Raw materials that are directly incorporated into a finished product and are easily traceable to it.

Labour Rate Variance

The difference between the actual labor costs incurred and the standard labor costs for the actual production level.

Actual Rate

The actual cost incurred or the price paid for materials, labor, or overhead as opposed to budgeted or standard costs.