Making sure that the excess earnings capitalization rate
is large enough is one of the main reasons for using an excess earnings model.
As expense margins and proprietary earnings percentages decline, the HUD proprietary earnings capitalization rate
premium without management expenses declines.
For the earnings capitalization rate
calculation, the market value column was designated as the Y variable and the earnings column as the X variable.
In the excess earnings method, a single value estimate for tangible assets is multiplied by a single capitalization rate and this net income allocation to tangible assets then is subtracted from total net income, and any remaining (excess) income is considered attributable to goodwill and is capitalized at an excess earnings capitalization rate
.(11) The model presented here treats several asset categories separately in order to identify explicitly and analyze the risk and value components of the going-concern.