CSI FP2 Dumps Questions Answers

Capitalization of earnings is the appropriate answer because a going-concern business is valued principally on its ability to generate maintainable future earnings.

Under the capitalization approach, the valuator first determines a representative or maintainable level of normalized earnings. Non-recurring items, unusual owner compensation, discretionary expenses, and other distortions may be adjusted. Those maintainable earnings are then capitalized using an appropriate capitalization rate reflecting business and financial risk. In simplified form:

Business value = Maintainable earnings ÷ Capitalization rate

CRA valuation policy recognizes earnings and asset-value approaches as principal valuation methods and notes that earnings are particularly important when valuing operating businesses. It further states that going-concern valuation is normally appropriate where a business is a continuing enterprise capable of earning a reasonable return.

Discounted cash flow is another valid income-based method, but it generally requires explicit forecasts of future cash flows and terminal value and is often used where future performance can be projected with sufficient reliability.

Adjusted book value is more asset-oriented, while liquidation value assumes assets are being realized rather than the business continuing as an operating enterprise.

FPII reference/topic: Financial Planning for Small Business — business valuation; capitalization of maintainable earnings; going-concern versus asset-based valuation.

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In an agency relationship, the principal is the person on whose behalf the agent acts. The agent is the person authorized to act for the principal, while a third party is the external person or organization with whom the agent deals in carrying out that authority.

Here, Nelson Smith retained Jackie Fraser as his financial advisor. Jackie places the investment order on Nelson's behalf. Nelson is therefore the principal, and Jackie is acting as the agent in the transaction.

The transaction is placed with QBR Investments Inc., the entity offering the QBR Balanced Fund. QBR Investments is therefore the relevant third party with whom the agent deals for the principal.

Jackie's employer, FP Inc., does not replace Nelson as the principal in the client-advisor agency relationship described by the question. Similarly, QBR Insurance Company's status as the parent of QBR Investments does not make it the relevant third party because the actual fund transaction is with QBR Investments.

The legal distinction matters because an agent owes obligations to the principal and must act within the authority conferred by that principal.

FPII reference/topic: Financial Planning Practice — agency law; principal-agent relationships; authority; dealings with third parties.

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Independent legal advice is highly advisable when parties enter into a domestic contract, but it is not itself one of the statutory formal execution requirements for a valid domestic contract under Ontario's Family Law Act.

Section 55 of the Act provides that a domestic contract is unenforceable unless it is in writing, signed by the parties, and witnessed. Independent legal advice significantly strengthens the reliability and enforceability of an agreement because it helps demonstrate that each party understood the rights being surrendered and entered the agreement voluntarily. Its absence, however, does not automatically mean that the statutory form requirement has not been met.

Financial disclosure has a different legal significance. Under the statutory framework, failure to disclose significant assets, debts, or liabilities existing when the contract was made may provide grounds for the court to set aside the agreement. Consequently, complete and accurate disclosure is a critical component of defensible domestic-contract planning.

For financial planners, the practical distinction is important: planners should not provide legal advice on drafting the contract, and clients should normally be referred to separate family-law counsel even though independent legal advice is not technically one of the execution formalities.

FPII reference/topic: Family Law — domestic contracts; marriage and cohabitation agreements; disclosure; independent legal advice; enforceability.

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