Question

Capitalization is the process by which the estimated future annual net income is used as the basis to:

a) determine value.
b) estimate value.
c) establish depreciation.
d) calculate potential tax liability.

Answer 1

Capitalization is the process of using the estimated future annual net income as the basis to determine value in business and finance. It involves valuing a company or investment by applying a multiple to its projected earnings. This multiple can vary based on industry, growth prospects, and market conditions.

Step-by-step explanation:

Capitalization is the process of using the estimated future annual net income as the basis to determine value. It is an important concept in business and finance. For example, when valuing a company, analysts might use the company's projected earnings to calculate its worth.

One way to calculate the value of a business or an investment is by applying a multiple to its estimated future earnings. This multiple can vary based on various factors, including the industry, the company's growth prospects, and the prevailing market conditions.

For instance, if a company is expected to earn $1 million per year and the industry average multiple is 10, the value of the company could be estimated at $10 million.