Question

The formula of capitalisation method is ___________.

• A. $\frac{Profit\left(adjusted\right)}{100}$
• B. $\frac{\text{Total Profit}}{\text{Adjusted Profit}}$
• C. $\frac{\text{Adjusted Profit}}{\text{Total Profit}}\times 100$
• D. $\frac{Profit\left(Adjusted\right)}{\text{Normal rate of Return}}\times 100$

Answer 1

The correct option is D $\frac{Profit\left(Adjusted\right)}{\text{Normal rate of Return}}\times 100$

Capitalisation method is a method of determining the value of a firm by calculating the net present value of expected future profits or cash flows of the firm. It is used when the actual profits of the firm is less than the normal profits. It is calculated by dividing the adjusted profit by normal rate of return.