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

Fixed costs, Fixed Costs The costs a rigid incurs doing business that d...

Fixed Costs The costs a rigid incurs doing business that do not change in relation to production. Rent, for example, is a fixed cost because it remains constant whether product

Cost of Capital, The Nu-Nu Brothers Inc. (NNBI) has the following capital s...

The Nu-Nu Brothers Inc. (NNBI) has the following capital structure, which it considers to be optional: Debt 25% Preferred Stock 15% Common Equity 60% NNBI''''s expected net income

Baumol model, A campany estimate a cash requirment of 900000 the opportunit...

A campany estimate a cash requirment of 900000 the opportunity interst eate is 9% per anual the transaction cost for borrowing or withdrawing fund is 264.5

Define the term- earnings per share, Define the term- Earnings per share (E...

Define the term- Earnings per share (EPS) EPS = Profit available to ordinary shareholders (PAT) / Weighted average number of shares in issue(p per share) This ratio illustra

Capital budgeting, #how to calculate initial investment cash flows ..

#how to calculate initial investment cash flows ..

What is the rationale of the double-play strategy, Q. What is the rationale...

Q. What is the rationale of the double-play strategy? The hedge funds deploy a double-play strategy in order to engineer steep increases in interest rates and steep declines in

Which type of insurance company generally takes risks, Which type of insura...

Which type of insurance company generally takes on the greater risks: a life insurance company or a property and casualty insurance company? The risks protected against by cas

What is an audit?, Question 1 What is Depreciation? Question 2 What a...

Question 1 What is Depreciation? Question 2 What are the elements of an accounting system? Question 3 How do you prepare Flexible Budget? Question 4 Briefly explain

Explain composite currency bond, Explain Composite Currency Bond Compos...

Explain Composite Currency Bond Composite currency bonds are denominated in a currency basket, like SDRs or ECUs, in place of a single currency.They are often known as currency

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