In: Finance
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
Ans :- (a) || & ||| only
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.