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

How do we calculate the payback period, How do we calculate the payback per...

How do we calculate the payback period for a proposed capital budgeting project? What are the major criticisms of the payback method? We compute the payback period for a proposed

Difference international and domestic financial management, How is internat...

How is international financial management different from domestic financial management? Answer:  There are three main dimensions that set separately international finance from

Expalin purchase outright and leaminger plc, LEAMINGER PLC (a) Purchas...

LEAMINGER PLC (a) Purchase outright (2) Balancing allowance Tax effect = 93,906 × 30% = 28,172 Finance lease Annuity Factor (AF) at 10% for 4 year

Advent of euro affect international diversification strategy, Explain how t...

Explain how the advent of the euro would affect international diversification strategies. Answer: As the euro-zone will have similar exchange-rate policies and monetary, the co

Zero-coupon bonds, All the bonds are not making periodic coupon payments. ...

All the bonds are not making periodic coupon payments. Zero-coupon bonds are those bonds where the bondholder realizes interest by buying it at a deep discount to its face

Leverage, What is the importance of leverage in business management of a sm...

What is the importance of leverage in business management of a small scale company

State the disadvantages of ias 14 risk and return approach, State the Disad...

State the Disadvantages of ias 14 risk and return approach Segments may include operations with different risk and returns. Difficulty in defining segments, which mak

Yield curve strategies, Yield curve strategies take into account the ...

Yield curve strategies take into account the distribution of the maturities of the bonds of the portfolio in order to take advantage of the forecasted movements o

Explain accept-reject criteria, Q. Explain Accept-Reject Criteria? Acce...

Q. Explain Accept-Reject Criteria? Accept-Reject Criteria:- If actual ARR is elevated than the predetermined rate of return .......................Project would be accep

Analyse and interpret company financial statements, INSTRUCTIONS Downl...

INSTRUCTIONS Download the 2011 Annual Report for Marks and Spencer PLC, from the link provided on Study Space. Review the Annual Report, paying particular attention to the Fin

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