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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

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Expert Solution

Business can discount the negative effect of the coronavirus in this 3 months by redefining their cash flows and redefining their growth in the cash flows, which has completely taken a backseat because the demand has completely evaporated and there has been a prediction of of slowing of demand.

the governments are trying to stimulate the demand through interest rate cuts and trying to bailout so the negative cash flows can be discounted in to the business by reduction of the growth rate, and reduction of the the estimated profits in the near term because there would be less collection and there would be a probability of higher bad debt due to disposable income of the people going down and the credibility of the people also going down because of their decreasing creditworthiness.

So overall, it can be said that the discount rate which hashas to be applied to the growth can be readjusted along with the profit projection so that negative cash flows in the future can be discounted to a large extent.

jeff jeffy answered 1 year ago
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