Certified Valuation Analyst (CVA) Practice Exam

Which method is used to evaluate the economic worth of Geri Co?

1. Asset-based approach

2. Market approach

3. Income approach

4. Excess earnings method

The correct answer is: Excess earnings method

The Excess Earnings Method is a hybrid approach used primarily to value businesses, particularly small to mid-sized companies. It is most effective when evaluating companies with intangible assets or when the business's earnings are inconsistent or not easily projected. This method combines elements of the income and market approaches and specifically focuses on the unique earnings derived from the intangible aspects of the business, such as goodwill. In this context, the Excess Earnings Method begins by determining the company's total earnings before interest and taxes, assessing what can be attributed to tangible assets, and then calculating the "excess" earnings that can be attributed to the intangible assets. This helps provide a clear picture of the economic worth of Geri Co by isolating the value generated from its intangible assets, such as brand reputation and customer relationships, among others. Other methods, while valuable, might not capture the nuanced economic value of Geri Co in the same way. The Asset-based approach focuses primarily on the company's physical assets, whereas the Market approach looks at comparable businesses for valuation metrics. The Income approach, on the other hand, forecasts future earnings, which can be difficult if those earnings are subject to fluctuations or if the business heavily relies on intangible factors for its earnings, making the Excess Earnings Method the preferred choice in this