Certified Valuation Analyst (CVA) Practice Exam

What was the simple average of Company A's historical normalized cash flows?

1. $392,000

2. $450,000

3. $500,000

4. $380,000

The correct answer is: $392,000

To determine the simple average of Company A's historical normalized cash flows, one must sum all the historical normalized cash flow figures and then divide that sum by the total number of cash flow data points available. The calculation involves a straightforward arithmetic process and provides a measure that represents an expected cash flow performance over the specified period. If the correct answer is presented as $392,000, it suggests that the total of the normalized cash flows was computed correctly, resulting in this average. A simple average is particularly useful, as it smooths out fluctuations in cash flow from year to year, allowing analysts to get a clearer picture of the company’s performance over time. To achieve this figure, one would first verify that all cash flow figures used were indeed normalized, meaning they have been adjusted for one-time events or fluctuations that don't reflect the true ongoing performance of the company. By focusing on normalized cash flows, you ensure that the average reflects expected future performance rather than anomalies or extraordinary items, which could distort the average if included. Determining the simple average is fundamental in valuation assessments as it provides a baseline that analysts can use for further financial analysis, forecasting, and comparisons with industry standards. In contrast, the other options, which suggest different sums, might indicate that either