Wednesday, September 8, 2010

What is Income Capitalization?

In order to calculate income capitalization, you must first assess the company's capitalization rate . This capitalization rate is a rate of return required to take on the risk of operating the business. In general, the riskier the business, the higher the required return will be for an investor.

The earnings of the business are then divided by that capitalization rate. The earnings to be capitalized need to reflect the true nature of the business, such as the last five years average, current year or projected year's earnings.

Lastly, when determining an income capitalization rate you should compare with rates available to similarly risky investments that are on public or private market to ensure that your calculations are in line with expectations and correct income capitalization computations.

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