Income approach

Valuing an asset from the income it is expected to produce, by capitalising one normalised year or discounting a forecast. Used for property and for businesses with predictable cash flows.

Where you will meet it

Income approach appears in 5 learning outcomes on the CFA syllabus. A few of them:

• Outline the main methods for valuing real estate
  CFA Level I · Alternative Investments

  “The income approach capitalises expected net operating income, either by dividing a stabilised figure by a capitalisation rate or by discounting a forecast cash flow stream.”

• Explain the asset-based, market and income ways of valuing a private firm and what bears on choosing each one
  CFA Level II · Equities

  “The income approach values a business from the economic benefits it is expected to produce, either by capitalising one normalised cash flow or by discounting a forecast, and suits companies with predictable cash flows or clear growth prospects.”

• Explain how due diligence is carried out on real estate investments and the approaches used to value them
  CFA Level II · Alternative Investments

  “The income approach capitalises income.”

• Explain how private property investments are vetted and valued
  CFA Level III · Private Markets Pathway

  “The income approach uses direct capitalisation (NOI ÷ cap rate) or a DCF of the lease cash flows plus a terminal value.”

Practise it

• Today's practice question One question, with every wrong option explained.
• Free Level I diagnostic test Twelve questions that show which topics to start with.
• Free finance calculators Check your arithmetic on the exam's core formulas.

All terms beginning with I · Glossary