Question

Define “Financial Value”. Explain how this definition leads to the various mathematical methods that are employed to estimate the financial value of investment securities. In your answer you may examine the impact of risk and uncertainty in determining a result.

Answer 1

Financial value will mean worth of an asset in terms of the monetary value and this will be providing us with an idea about the value associated with the financial asset. Financial value is just like the intrinsic value of a security which is used to provide with the overall worth of that security in financial world in monetary terms.

This definition leads to various mathematical methods which are used to calculate the overall value of financial asset like discounted cash flow method along with Capital Asset pricing method and other methods which are including discounting of the cash flows associated with the business at the present in order to derive the value of the security as well as we are also finding out the risk and other uncertainty associated with the stock in terms of the beta and standard deviation and other statistical terms which are used for determination of Worth associated with asset in the long run so that it will help us in order to formulate the overall growth prospective and the futuristic valuation of the company which will be discounted at the present in order to provide with the approximate value of the company in terms of money.

Risk and uncertainties are often discounted before we are able to determine the worth of the company because risk and uncertainty are to be discounted at present value in order to ascertain the overall value associated with the security so it is related to a lot of mathematical tools in order to eliminate the risk and uncertainty in order to arrive at approximate value of financial security.