Build Up Method - Business Valuation

The video tutorial explains the build-up method of business valuation, which is similar to the earnings capitalization model. It involves determining normalized earnings and dividing them by a capitalization factor to estimate a company's value. The capitalization factor is derived from the expected rate of return, which includes the risk-free rate, equity risk premium, size premium, and company-specific premium. The tutorial details how to calculate these components and emphasizes the importance of assessing company-specific risks. The build-up method focuses on determining the discount rate for extrapolating company value.

What is the primary goal of the build-up method in business valuation?

• To assess the company's management efficiency

• To estimate the company's value using a capitalization factor

• To calculate the company's normalized earnings

• To determine the company's market share

Which of the following is NOT a component of the expected rate of return in the build-up method?

• Risk-free rate

• Equity risk premium

• Market share premium

• Size premium

How is the risk-free rate of return typically determined?

• By analyzing the company's past performance

• By considering the company's growth potential

• By evaluating industry trends

• By using the return from risk-free securities

Why might a smaller company have a higher size premium?

• Because it has a larger market share

• Because it may entail greater risk

• Because it is considered more secure

• Because it has more assets

What is the final step in the build-up method to determine the company's value?

• Subtracting liabilities from assets

• Multiplying normalized earnings by the capitalization factor

• Dividing normalized earnings by the capitalization factor

• Adding the company's market share to its earnings