Question

The capitalized cash flow approach is commonly used for valuation under what circumstances?

a) During economic downturns.
b) When assessing short-term investments.
c) In stable and predictable income scenarios.
d) In highly volatile market conditions.

Answer 1

The capitalized cash flow approach is commonly used for valuation in stable and predictable income scenarios, as it relies on the estimation of future cash flows that are consistent over time.

Step-by-step explanation:

The capitalized cash flow approach is commonly used for valuation in scenarios where future income streams are stable and predictable. This approach involves estimating the future cash flows a business will generate, which can then be capitalized or converted into a present value. The correct answer for the circumstance under which this approach is used would be:

c) In stable and predictable income scenarios.

This method is not typically used during economic downturns, for assessing short-term investments, or in highly volatile market conditions because in such environments, projecting stable cash flows becomes considerably more challenging, thus making the approach less reliable.