Question

1. Cash flows and risk are key determinants of a company’s share price. What impact if any would an increase in future cash flows have on a company’s share price ceteris paribus (all other considerations remaining unchanged)? Why?

Answer 1

One of the way of calculating company's share price is discount the future cash flow at required rate of return, rate of return calculated based on the risk involved in the company. If risk increases in the company shareholders demand higher rate of return and future cash flows discounted at a higher rate and thare price will be decreases.

Howeave if Future cash flows increases, seteris paribus, the price of a share would also increase. Because higher cash flows will be discounted at same required rate of return and you will get higher prices.