Question

In: Finance

Which of the following times are needed to determine the value of a financial asset? I....

Which of the following times are needed to determine the value of a financial asset?

I. holding period

II. amount and time of each cash flow

III. risk-adjusted discount rate

IV. tax rate

a.

II and III only

b.

I and IV only

c.

I and III Only

d.

II and IV only

justify answer

Solutions

Expert Solution

Ans :- (a) || & ||| only

  • Valuation is the process of determining the fair value of a financial asset.
  • The fundamental principle of valuation is that the value of any financial asset is the present value of the expected cash flows, the principle applies regardless of the financial asset.
  • The valuation of a financial asset involves the following three steps: (1) estimate the expected cash flows.(2) determine the appropriate interest rate or interest rates that should be used to discount the cash flows and (3) calculate the present value of the expected cash flows using the interest rate or interest rates.

Amount & time of cash flow - Cash flow is the cash generated by operations, which is attributed to all providers of capital in the firm's capital structure. This includes debt providers as well as equity. Calculating the cash flows is done by taking earnings before interest and taxes and adjusting for the tax rate, then adding depreciation and taking away capital expenditure, minus change in working capital and minus changes in other assets.

Risk adjusted discount rate - is a valuation method used to estimate the attractiveness of an investment opportunity. It uses future free cash flow projections and discounts them (most often using the weighted average cost of capital,) to arrive at a present value, which is then used to evaluate the potential for investment. If the value arrived at through discount rate is higher than the current cost of the investment, the opportunity may be a good one.


Related Solutions

The value of any financial asset is the -Select- value of the cash flows the asset...
The value of any financial asset is the -Select- value of the cash flows the asset is expected to produce. For a bond with fixed annual coupons, its value is equal to the present value of all its annual interest payments and its maturity value as shown in the equation below: We could use the valuation equation shown above to solve for a bond's value; however, it is more efficient to use a financial calculator. Simply enter N as years...
Financial markets can be classified by which of the following? Owner of the financial asset All...
Financial markets can be classified by which of the following? Owner of the financial asset All of the above can be classifications of financial markets. Type of asset traded Maturity of the financial asset
Profit margin is 10%, asset turnover is 1.5 times, financial leverage is 2.0 times, earnings per...
Profit margin is 10%, asset turnover is 1.5 times, financial leverage is 2.0 times, earnings per share are $2.00 and dividends per share are $2.50. Which of the following statements is correct: 1. The return on assets is greater than the return on equity             2. The return on equity is greater than the sustainable growth rate             3. The sustainable growth rate is greater than the return on assets             4. The stock is over valued
If I toss a fair coin 50,000 times which of the following is true? a) the...
If I toss a fair coin 50,000 times which of the following is true? a) the number of heads should be between 15,000 and 25,000. b) the proportion of heads should be close to 50%. c) the proportion of heads in these tosses is a parameter. d) the number of heads should be exactly 25,000. e) the proportion of heads will be close to 1.
Which of the following features best defines a financial intermediary?  An asset sold by a company which...
Which of the following features best defines a financial intermediary?  An asset sold by a company which entitles the buyer to partial ownership  A claim by a buyer to a future payment by a seller  A financial institution that transforms investor funds into financial assets  A collection of stocks and bonds issued to investors
Cherub purchased a financial asset on 1 October 2019, which it measured at fair value through...
Cherub purchased a financial asset on 1 October 2019, which it measured at fair value through other comprehensive income, in accordance with its business model. The asset had a nominal value of $12 million, a coupon rate of 3% payable in arrears and was purchased on market for $10 million. The effective rate of interest is 6% and the fair value of the asset at the reporting date of 30 September 2020 was $9 million. At the reporting date, the...
Asset acquisition vs. stock acquisition (fair value is different from book value) The following financial statement...
Asset acquisition vs. stock acquisition (fair value is different from book value) The following financial statement information is for an investor company and an investee company on January 1, 2019. On January 1, 2019, the investor company’s common stock had a traded market value of $35 per share, and the investee company’s common stock had a traded market value of $31 per share. Book Values Fair Values Investor Investee Investor Investee Receivables & inventories $120,000 $60,000 $108,000 $54,000 Land 240,000...
Asset retirement costs are: (which is correct) added to the carrying value of the related asset...
Asset retirement costs are: (which is correct) added to the carrying value of the related asset in pro rata periods over the asset’s useful life. are never recognized until the asset is retired. are added to the carrying value of the related asset in the period of acquisition. are not recognized until the dismantling and restoration costs are known with certainty.
In finance we say that the value of a financial asset can be calculated as the...
In finance we say that the value of a financial asset can be calculated as the present value of the future expected cash flows associated with that asset, list and describe the future expected cash flows associated with a bond. How often do bonds typically pay coupon payments? As a result, which of the TVM components need to be adjusted (and how) when calculating the value of a bond? Conduct some Internet research to answer the question: are bonds generally...
One of the basic financial principles is that the value of any asset (whether it be...
One of the basic financial principles is that the value of any asset (whether it be a stock, a bond, or a firm as a whole) is the present value of that asset’s future cash flows. Finding present values requires determining a discount rate. Assume you want to buy a business, and you want to find the present value of its future cash flows. Name at least one variable you should consider in determining the correct discount rate to use...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT