Final answer:
The valuation method that uses net profit adjusted for unusual items divided by a capitalization rate is known as valuation capitalization of earnings. It is used to estimate the value of a business with stable earnings, differentiating it from other methods like market estimation, price/earnings ratios, and asset-based valuation.
Step-by-step explanation:
Valuation Capitalization of Earnings Method Explanation
The method of valuation by taking the net profit of an organization, adjusting for any unusual items, and then dividing it by a capitalization rate is known as b. valuation capitalization of earnings. This approach is generally used to estimate the value of a business with a steady stream of earnings. It involves the following steps: Firstly, you calculate the net profit which is typically derived from the company's income statement. Then, you adjust this profit figure for any extraordinary or one-time events to ensure the income considered is sustainable and recurring. Finally, you divide this adjusted profit by a chosen capitalization rate, which often reflects the desired rate of return or the risk associated with the investment.
For example, if we consider the provided accounting profit calculation, Accounting profit = total revenues minus explicit costs = $1,000,000 - ($600,000+ $150,000 + $200,000) = $50,000. Assume this is the net profit, and there are no unusual items to adjust. If the chosen capitalization rate is 10%, then the valuation would be $50,000 / 0.10 = $500,000.
This method is different from market estimation, price/earnings valuation, and asset-based valuation, which use different sets of criteria and calculations to determine a business's value.