Determining the appropriate rates in valuation process, Financial Management

Assignment Help:

After estimating the cash flows, the next step is to determine the appropriate interest rate that should be used to discount the cash flows. The minimum return required by an investor should be equal to the risk free rate of return plus risk premium. In  India , we can take yield on a 90-day Treasury bill as a risk-free rate. Any investor who invests in 90 days Treasury bill, will receive a return equal to risk-free rate. But the investors who invest in corporate bonds seek  some extra return over risk free rate for the additional risk are taking. This additional return is known as the risk premium.

So, appropriate rate is,

         Appropriate Rate = Risk Free Return + Risk Premium.

Mostly people use one interest rate of all estimated cash flows. However, since each cash flow is unique so it is better to use a unique interest rate for each cash flow.

Government paper with tenor more than one year is known as dated security. 


Related Discussions:- Determining the appropriate rates in valuation process

Obtain the break even rate, Question 1 (a) These are merely the diffe...

Question 1 (a) These are merely the differences of the two prices. Consequently the mark to market losses are given by { Q 1 - Q 0 ,Q 2 - Q 0 ,Q 3 - Q 0

Evaluate optimum price of the new machine, Q. Evaluate optimum price of the...

Q. Evaluate optimum price of the new machine? The optimum price will be the one which optimises total contribution over the five-year life of the new machine. Sales price o

Case let 1, which type of approaching to each firm

which type of approaching to each firm

Identify the parties by name that have an obligation, Identify the parties ...

Identify the parties by name that have an obligation: a. Buyer/Alpha hears a rumor that the toys have not been manufactured according to the expected specifications for such t

Assignmebt solution, Select a company (excluding finance sector) of Bursa M...

Select a company (excluding finance sector) of Bursa Malaysia (www.bursamalaysia.com). Analyse and comment on the liquidity and profitability performance of the selected company fr

Explain about working capital funding policy, When considering how working ...

When considering how working capital is funding it is useful to divide assets into permanent current assets, noncurrent assets and fluctuating current assets. Permanent current ass

#title Find the NPV of 2 Projects, Woody Construction is considering a new ...

Woody Construction is considering a new 3 year expansion project that requires an initial fixed asset investment

Explain difference among the discounted free cash flow model, Explain the d...

Explain the difference among the discounted free cash flow model as it is applied to the valuation of common equity and as it is applied to the valuation of whole businesses. The

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd