Certified Valuation Analyst (CVA) Practice Exam

What is the after-tax capitalization rate given the price earnings ratios of 5.2, 4.6, 3.4, and 4.86?

1. 20.15%

2. 22.15%

3. 23.75%

4. 24.00%

The correct answer is: 22.15%

To determine the after-tax capitalization rate using the provided price-earnings (P/E) ratios, it is essential to recognize that the capitalization rate (Cap Rate) is generally calculated as the inverse of the P/E ratio. The formula for calculating the capitalization rate is: \[ \text{Capitalization Rate} = \frac{1}{\text{Price-Earnings Ratio}} \] When you have multiple P/E ratios, you first calculate each rate and then derive an average, which is typically the preferred method in valuation practices. For each P/E ratio: 1. For a P/E ratio of 5.2, the Cap Rate is approximately \( \frac{1}{5.2} \approx 19.23\% \). 2. For a P/E ratio of 4.6, the Cap Rate is approximately \( \frac{1}{4.6} \approx 21.74\% \). 3. For a P/E ratio of 3.4, the Cap Rate is approximately \( \frac{1}{3.4} \approx 29.41\% \). 4. For a P/E ratio of 4.86, the Cap Rate is approximately \( \frac{1