Question

The discounted earnings approach is most often used in merger and acquisition valuations. This approach is similar to the DCF approach. It is rarely used to value a business for purchase or sale.

Conceptually, this valuation approach is consistent with the capitalized earnings approach, except that earnings in the next few years are expected to be volatile before leveling out.
For this reason, the earnings during the volatile years need to be separately valued from earnings in the steady-state years.

a) Discounted earnings approach is commonly used in business valuation.
b) Discounted earnings approach is similar to the DCF approach.
c) Discounted earnings approach is rarely used.
d) Discounted earnings approach only considers volatile years.

Answer 1

The discounted earnings approach is commonly used in mergers and acquisitions, but rarely used for valuing a business for purchase or sale. It is similar to the DCF approach and accounts for the volatility of earnings in the next few years.

Step-by-step explanation:

The discounted earnings approach is a commonly used valuation method in mergers and acquisitions. It is similar to the discounted cash flow (DCF) approach. However, it is rarely used to value a business for purchase or sale.

The discounted earnings approach is consistent with the capitalized earnings approach, but it takes into consideration that earnings in the next few years may be volatile before stabilizing. Therefore, the approach separately values the earnings during the volatile years from the earnings in the steady-state years.