Capitalization Factor

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Definition: Capitalization Factor

Capitalization factor is a multiple or a divisor which is used to convert expected income or benefits of a particular period into a value. It is used in the valuation of businesses (using the capitalization of earnings method). It is computed as the inverse of the expected rate of return.

 

Capitalization factor = 1/r or r-1

 

Value of business= Expected earnings*Capitalization factor

 

For example:- If the expected rate of return is 5%, the capitalization factor would be 1/.05=20.

Suppose the expected earnings of a business are INR 1,00,000 , the value of the business would be INR 20,00,000.

 

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