Question

2. It is obvious to even the least financially savvy person that the cash flows from General Electric have not remained constant over the last 125 years, and they are not likely to do so in the future. How could a growing annuity be used to value a corporation that has growth opportunities?

Answer 1

Growth rate of cash flows of a company are never consistent in nature and it is to be appropriated by the valuer by adjustment of different factors-

A. Life cycle of the company-the life cycle of the company is very important in order to determine the growth rate because the growth rate is different life cycles of the company would be different, because the growth rate in growth stage of the life cycle and maturity stage of the life cycle of a company would be completely different so it would be reflected in the cash flows of the company.

B. Adjustment of a default factor in valuation-there must be an adjustment of a default factor in overall valuation because the cash flows can never be predicted accurately and there should be a range bound analysis in order to predict the cash flows and when the the default rate regarding valuation is proactively defined it will mean that the share price can deviate up to a certain point of time.

C. There should also be a rangebound analysis and lower range and upper ends should be defined in order to know the correct valuation of the cash flows

D .adjustment of risk to the overall cash flows because there are certain macro as well as micro riks which are to be accounted when the cash flow valuation of the company is done in order to ascertain the correct cash flows and find relatively accurate value.

E.past trends of change in the cash flow should always be taken into consideration by the value in order to find out an appropriate change in the cash flow in the future years.

so these are the factors which are needed to be accounted in order to finding out the cash flows of a company related to the future because these factors can help the valuer in predicting the the almost accurate cash flows.