Certified Valuation Analyst (CVA) Practice Exam

Under what conditions are projected earnings used to estimate future income?

1. When historical data is unreliable

2. When no prior earnings history exists

3. None of the above

4. When there is no significant growth expected

The correct answer is: None of the above

Projected earnings are typically used to estimate future income when historical data is not a viable option for determining the company's financial outlook. This situation arises when historical data is deemed unreliable, such as when there have been significant changes in the business environment, management, or operations that affect the company's financial performance. In such cases, relying solely on past earnings would lead to inaccurate projections. Additionally, projected earnings may be utilized when no prior earnings history exists. This situation often applies to startups or newly established companies that do not have sufficient historical data to guide future income estimates. Regarding the scenario of no significant growth expected, it is generally insufficient on its own to warrant the use of projected earnings. Businesses typically approach income estimation from various perspectives, including historical data analysis and growth potential. Thus, the most appropriate answer might be better captured by recognizing the conditions where the use of projected earnings is pivotal, making the initially provided answer less comprehensive.