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. 

Posted Date: 9/10/2012 5:33:31 AM | Location : United States

Ask an Expert

Related Discussions:- Determining the appropriate rates in valuation process, Assignment Help, Ask Question on Determining the appropriate rates in valuation process, Get Answer, Expert's Help, Determining the appropriate rates in valuation process Discussions

Write discussion on Determining the appropriate rates in valuation process
Your posts are moderated

Write your message here..

Related Questions

Find NPV of 2 Projects, Woody Construction is considering a new 3-year expa... Woody Construction is considering a new 3-year expansion project that requires an initial fixed asset investment of $3.186 million. The fixed asset will be depreciated straight-lin

Share holder value maximizations , Question based on Share Holder Value Max... Question based on Share Holder Value Maximizations ? Hatsun Agro Product limited (HAPL) over the last Five years has shown a steady growth in its sales revenue and profits. The

Eco 372 final exam, eco 372 final exam eco 372 final exam

Scope of finance functions, SCOPE OF FINANCE FUNCTIONS The functions of... SCOPE OF FINANCE FUNCTIONS The functions of Financial Manager can generally be sub-divided into two: The Routine functions and the Managerial Functions. Managerial Finance F

Calculate the companys horizon value, A. Mitt starts Examine Your Zipper In... A. Mitt starts Examine Your Zipper Incorporated ("XYZ") in 2012 by selling common stock of $12,000,000. He promises the investors in his company a 15% return on their capital. B

Interpretations of profitability ratio''s, Interpretations of Profitability... Interpretations of Profitability Ratio's - ROA:       ROA or the Return on Assets ratio is the ratio of net profit to total assets and this ratio indicates whether total assets

Expected monthly return, In this exercise you will construct efficient port... In this exercise you will construct efficient portfolios with 5 risky assets using Excel's non-linear optimization routing "Solver". The questions are designed to be sequential and

Why is the coefficient of variation a better risk measure, Why is the coeff... Why is the coefficient of variation a better risk measure to use than the standard deviation when evaluating the risk of capital budgeting projects? The coefficient of variatio

Explain the market analysis of events, Question 1 Describe the Cost Vol... Question 1 Describe the Cost Volume Profit analysis. Explain its features, objectives and elements(CVP analysis) Question 2 Write in detail about the classification of

Planning, how to do assignments based on these topics more specifically? how to do assignments based on these topics more specifically?