In the Capitalized Excess-Earnings Method (also called the Capitalized Earnings Method in NACVA coursework), the analyst:

1) determines the company’s net tangible asset value,

2) normalizes economic earnings,

3) computes the “excess” (earnings above a fair return on tangible assets), and

4) capitalizes those excess earnings using an appropriate multiple or direct capitalization rate.

Only a direct capitalization rate for the excess earnings (or for the total normalized earnings) is required; the procedure does not call for estimating an “indirect” capitalization rate, a term used in real-estate valuation when a discount rate is converted to a cap rate. Hence option D is the single item that is not a typical step.

A. Estimating net tangible asset value is the first step; it establishes the base return before excess earnings are computed.

B. Normalizing economic earnings is essential to isolate maintainable performance.

C. Quantifying excess earnings is the core of the method—intangible value arises from this amount.

1. Pratt, S., & Niculita, A. “Valuing a Business”, 6th ed., McGraw-Hill, 2022, pp. 402-404: procedure list for Capitalized Excess-Earnings Method (steps 1–4).

2. NACVA, Business Valuation: Fundamentals, Techniques & Theory, 2021 Course Manual, Chapter 11, pp. 11-8–11-11: outlines steps identical to A, B, and C; no mention of an “indirect” cap rate.

3. AICPA VS Section 100, “Valuation of Businesses”, §70.38-§70.40 (2020): describes selecting a direct capitalization rate for excess earnings; indirect rates referenced only in real-property appraisal contexts.