AccountingBLOCK

The question here states that: for the purpose of the amalgamation, business are to valued at the weight average operating profit for the past 5 years, capitalized at 20%

What does the capitalized at 20% mean? This is a partnership amalgamation question.

Capitalizing net profits or operating profits is a method sometimes used to determine the value of a business when you want to sell it.

Say your business has been averaging $10,000 per year net profits for the past five years. You decide to sell it and need to come up with a reasonable price.

What you could do is capitalize the $10,000 average net profits by 20%. This simply means you divide the $10,000 by 20% which equals $50,000.

The $50,000 is the value of the business. Whether you would get it or not is another story.