Capitalized Excess Earnings method is a financial valuation method that computes value of a business by summation of net tangible assets and the capitalized value of excess earnings, which can be attributed to intangibles like reputation.
Procedure:
Example:
Shivraj Enterprises has net tangible assets worth Rs. 5,000,000. Rate of return on tangible assets is 10%, and rate of return on intangibles is 20%. Income before taxes is Rs. 800,000 for that year.
According to procedure mentioned above,
Tangible assets = 5,000,000
Earnings attributable = 5,000,000 * 10%
= 500,000
Excess earnings = Total earnings – earnings attributable to tangibles
= 750,000 – 500,000
= Rs. 250,000
Capitalized value = 250,000 / 20%
= Rs. 1,250,000
Hence, this concludes the definition of Capitalized Excess Earnings Method along with its overview.
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