Certified Valuation Analyst (CVA) Practice Exam

When are historical earnings typically used to estimate future income?

1. When current income is higher than past income

2. When all of the above situations apply

3. When there is a steady growth pattern

4. When the industry is volatile

The correct answer is: When all of the above situations apply

Historical earnings are primarily used to estimate future income when there is a steady growth pattern in the business's financial performance. This approach allows analysts to establish a reliable projection based on past performances that demonstrate consistent trends. In cases where current income is higher than past income, analysts might consider multiple factors, including whether this increase is sustainable or a temporary spike. If the industry is volatile, reliance solely on historical earnings might not provide an accurate prediction for future income due to potential fluctuations and uncertainties in the market. Therefore, the inclusion of "all of the above situations apply" encompasses scenarios where analysts need to consider historical income due to varying market conditions or income patterns. The correct approach is to incorporate historical earnings when there's a reliable trend indicating future performance, especially when growth is steady, making the estimation more predictable.