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

Investable capital market portfolio, The Total Investable Capital Market Po...

The Total Investable Capital Market Portfolio According to a report prepared by McKinsey in January 2007, World financial assets including bonds, stocks, corporate debt securit

Explain the asset substitution effect, Question: a. Explain what the de...

Question: a. Explain what the debt overhang problem is (following the lines of Myers 1977) make sure that you specify what the relevant conflict of interest is and what are the

Graphical depiction using duration to estimate price changes, The price vol...

The price volatility properties of bonds with the help of the graph of the price/yield relationship. Let us now, with the help of a graph, illustrate how duration estim

Define deadweight loss, What is meant by deadweight loss?  Why does a price...

What is meant by deadweight loss?  Why does a price ceiling usually result in a deadweight loss? Deadweight loss considers to the benefits lost to either consumers or producers

How do risk-averse investors compensate for risk, How do risk-averse invest...

How do risk-averse investors compensate for risk when they take on investment projects? Due to the risk aversion, people demand higher rates of return for taking on higher-risk p

Investment decision and financing decision, The Investment Decision: - Inv...

The Investment Decision: - Investment decision as well known as 'Capital Budgeting' is related to the selection of long-term assets or else projects in which investments will be m

State about the detection risk, State about the Detection risk This is ...

State about the Detection risk This is the risk that auditors 'substantive procedures don't detect a material misstatement in an account balance or class of transactions. It is

Statement of cash flows, Statement of Cash Flows A formal statement of ...

Statement of Cash Flows A formal statement of the cash received and disbursed through an organization. The statement of cash flows is separate into three sections that are inve

Explain the factors that are responsible for recent surge, What factors are...

What factors are responsible for the recent surge in international portfolio investment (IPI)? Answer:  The recent surge in international portfolio investments denotes the global

The authority and duties of shareholders, The authority and duties of membe...

The authority and duties of members (shareholders) Members and shareholders shall together and severally protect, conserve and actively exercise the supreme authority of the co

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