Enter the earnings and capitalization rate into the calculator to determine the value of the business. This calculator can also evaluate any of the variables given the others are known.
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Capitalization of Earnings Method Formula
The following formula is used to calculate the value of a business using the Capitalization of Earnings Method.
V = E / R
Variables:
- V is the value of the business ($)
- E is the earnings of the business ($)
- R is the capitalization rate (decimal)
To calculate the value of a business using the Capitalization of Earnings Method, divide the earnings of the business by the capitalization rate. The result is the estimated value of the business.
What is a Capitalization of Earnings Method?
The Capitalization of Earnings Method is a valuation technique used to determine the value of a company or investment. It involves estimating the future profitability of a business and then determining its present value by using a suitable discount rate. This method is based on the assumption that a business is worth the present value of its future earnings. It is commonly used in the valuation of businesses with predictable and stable earnings, and it requires a deep understanding of a company’s financial performance and the industry in which it operates.
How to Calculate Capitalization of Earnings Method?
The following steps outline how to calculate the Capitalization of Earnings using the formula: V = E / R.
- First, determine the earnings of the business ($).
- Next, determine the capitalization rate (decimal).
- Next, gather the formula from above = V = E / R.
- Finally, calculate the Capitalization of Earnings.
- After inserting the variables and calculating the result, check your answer with the calculator above.
Example Problem:
Use the following variables as an example problem to test your knowledge.
earnings of the business ($) = 5000
capitalization rate (decimal) = 0.08
