Certified Valuation Analyst (CVA) Practice Exam

What is the weighted average of Company A's historical normalized cash flows?

1. $400,000

2. $426,667

3. $450,000

4. $480,000

The correct answer is: $426,667

To determine the weighted average of Company A's historical normalized cash flows, one must analyze the cash flows over multiple periods and apply appropriate weights to each cash flow based on their relative importance. In this case, the weighted average is calculated by first summing the normalized cash flows for each year and then determining the weights based on how representative each year's cash flow is of the company's ongoing performance. The normalization process could include adjustments for nonrecurring items or irregular expenses to present a clearer picture of sustainable cash flows. The resulting value of $426,667 as the weighted average indicates a careful and accurate calculation of these cash flows, reflecting their significance in assessing the company's financial health and future projections. This figure suggests a balanced view of Company A’s historical performance, integrating various cash flows and providing insight into its operational efficiency. A different weighted average could lead to undervaluing or overvaluing the company's financial standing, which is critical in a valuation context. This correct selection demonstrates a thorough understanding of how to effectively normalize and analyze cash flows for valuation purposes, which is a key competency for a Certified Valuation Analyst.