Question

In: Finance

Suppose the government proposes a relief package in an urgent attempt to bail out virtually all...

Suppose the government proposes a relief package in an urgent attempt to bail out virtually all industries across the board and offset the economic damage unleashed by the 3-month long coronavirus [COVID−19] crisis episode, and indeed, keeps its promise.

Required: By approximately what factor [in the long-run] are businesses likely to discount their negative cash flows, to work out how much is needed to level their current losses?

Further Instructions:

  • Generally, I expect to see ‘some kind’ of formula or general rule, without much emphasis on quantitative values.

Solutions

Expert Solution

The businesses need to discount multiple factors in order to take into effect the negative cash flows to be reported in the future, because there is a lack of demand due to coronavirus crisis and businesses are expected to report a slow down in the revenues as well as these businesses are also expected to report loss as a consequence selection of decrease in the revenues.

The firm need to discount de-growth in its future revenue as well as it needs to to assign a high discounting rate, because the overall cash flows are to be estimated negatively in the future so the firm can always try to factor in various negative readjustment such as various risk exposure which could negatively impact the the cash flows of the firm so overall it can be summed up that will likely to report a degrowth in its profits and there should be a high rate of discounting which could be applied to the overall cash flows associated with the firm in the future.


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