Certified Valuation Analyst (CVA) Practice Exam

Is the MVIC/Sales ratio the inverse of the capitalization rate?

1. True

2. False

3. It depends on the company

4. It is always equal to the capitalization rate

The correct answer is: False

The MVIC/Sales ratio, which stands for Market Value of Invested Capital divided by Sales, is a financial metric used to assess the market’s valuation compared to a company's sales. The capitalization rate, on the other hand, is a measure commonly used in real estate or business valuation to indicate the expected rate of return on an investment, typically calculated by dividing net operating income by property value or price. These two metrics serve different purposes and are not reciprocally related in a mathematical sense. The MVIC/Sales ratio reflects how much investors are willing to pay for each dollar of sales, whereas the capitalization rate reflects the expected returns from an investment relative to its cost. Therefore, one is not the inverse of the other. While one might draw some correlations in specific contexts, they don't function as inverses in a consistent or universal manner. Hence, the distinction between how each metric is interpreted and applied in practice leads to the conclusion that the statement is false.