Certified Valuation Analyst (CVA) Practice Exam

What is the result of capitalized terminal value when net cash flows are projected?

1. It is equal to the value of cash flows in the last period

2. It represents the future cash flows beyond a specified projection period

3. It is irrelevant to discounting methods

4. It decreases as future cash flows increase

The correct answer is: It represents the future cash flows beyond a specified projection period

The calculation of capitalized terminal value is essential for assessing the value of a firm beyond a specific projection period. It represents the present value of all future cash flows that are expected to occur after the explicit forecast period ends, extending into perpetuity. Essentially, this value captures the idea that a business will continue to generate cash flows indefinitely, and it converts these anticipated future cash flows into a single value as of the end of the projection period. This approach is particularly significant in business valuation as it reflects the ongoing viability of the firm and its ability to generate income long after the detailed forecasts have been made. By capitalizing the expected cash flows, this terminal value gives a comprehensive picture of the company's total worth, acknowledging that future periods will contribute ongoing financial benefits. The other options do not accurately reflect the role and calculation of capitalized terminal value in the context of valuation. While the last period's cash flow can be a part of this calculation, it does not encompass the broader future cash flows anticipated. The notion of irrelevance to discounting methods undermines the core principle of valuation, which fundamentally relies on discounting future cash flows to present value. Additionally, while there might be scenarios where a decrease in future cash flows could affect terminal value, the general