Capitalization of Excess Earnings Assumptions

These options configure the Capitalization of Excess Earnings worksheets. See Working with Assumptions.

Earnings Base

Determines the economic base that is capitalized. Configures the Benefit Stream worksheet. EBT is earnings before taxes, EBIT is earnings before interest and taxes, and EBITDA is earnings before interest, taxes, depreciation and amortization.

Historic or Adjusted Base

Determines if the adjusted or historic financial statements are used as the basis for the forecasted financials.

Debt Free (Invested Capital)

Adds interest expense back to the benefit stream, applies weighted average cost of capital (WACC) to the capitalization rate, and deducts debt from the indicated value.

Assets or Equity

Sets the tangible base for calculating the normal return. Determines if the return is calculated on operating assets or operating net equity.

Adjusted or Historic

Determines whether the tangible base for calculating the normal return is from the historic or adjusted financial statements.

Built In Gains

Determines if built in gains are applied to the normal return.

Years to Use

Determines if the normal return is calculated from all the years of historical data or from the current year only.

Excess/Non-Operating Assets (Normal Return)

Includes excess and non-operating assets in the normal return. The value of the assets is calculated in the Excess and Non-Operating Assets worksheet.

Rate Calculation Method

Determines how the capitalization rate is calculated. ValuSource Pro supports two calculation methods, the Buildup Method and the Level of Persistence Method.

SBBI or D&P

Hides or shows the appropriate rows to match the equity risk premium data set. See SBBI and Duff and Phelps.

Which D&P Type

Enabled when the SBBI or D&P assumption (see above) is set to D&P Decile. Determines the rate type to apply from the Duff & Phelps data set: Excess of CAPM, or Arithmetic Mean.

Which D&P Size

Enabled when the SBBI or D&P assumption (see above) is set to D&P Decile. Determines the decile applied from the Duff & Phelps data set.

Capitalize Against

You can capitalize against the current benefit stream (Year 0) or against next year's (Year 1). The Ibbotson build up model produces a capitalization rate that is applied to next year's benefit stream. To apply the rate to the current year, the benefit stream is divided by one plus the growth rate.

Midyear Convention

Capitalizes the cash flows from the middle of the year. The mid-year cash flow is estimated by averaging the cash flows from the preceding year and the current year.

Industry Risk

Applies a risk premium for the industry to the capitalization rate. You can download the risk premium from our SBBI Database.

Level of Control

Applies a premium for control or a discount for lack of control in the indicated value calculation. The premium and discount are calculated in the Level of Control (Premium or Discount) worksheet. This assumption is enabled and disabled by the Application of Premiums, Discounts and Non-Operating/Excess Assets setting on the Project Assumptions sheet.

Marketability Discount

Applies a discount for lack of marketability in the indicated value calculation. The discount is calculated in the Marketability Discount worksheet. This assumption is enabled and disabled by the Application of Premiums, Discounts and Non-Operating/Excess Assets setting on the Project Assumptions sheet.

Excess/Non-Operating Assets

Includes excess and non-operating assets in the indicated value calculation. The value of the assets is calculated in the Excess and Non-Operating Assets worksheet. This assumption is enabled and disabled by:

The Application of Premiums, Discounts and Non-Operating/Excess Assets setting on the Project Assumptions sheet.

The Excess/Non-Operating Assets setting for the Normal Return (see above).

Level of Control for Excess/Non-Operating Assets

Applies the level of control premium or discount to the excess and non-operating assets in the indicated value calculation. This assumption is enabled and disabled by:

The Application of Premiums, Discounts and Non-Operating/Excess Assets setting on the Project Assumptions sheet.

The Excess/Non-Operating Assets setting for the Normal Return (see above).

Disabled if the Level of Control assumption is set to No Premium or Discount.

Marketability Discount for Excess/Non-Operating Assets

Applies the marketability discount to the excess and non-operating assets in the indicated value calculation. This assumption is enabled and disabled by:

The Application of Premiums, Discounts and Non-Operating/Excess Assets setting on the Project Assumptions sheet.

The Excess/Non-Operating Assets setting for the Normal Return (see above).

Disabled if the Marketability Discount assumption is set to False.

Rate Sensitivity

Determines if premiums and discounts are included in the values shown on the Rate Sensitivity worksheet.