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Chapter 4: Q1DQ (page 319)

How is the valuation of any financial asset related to future cash flows?

Short Answer

Expert verified

Valuation of financial assets depends upon valuing the present value of future cash flows from the financial asset.

Step by step solution

01

Financial Assets

Financial assets are the instruments or medium of earning returns. Financial assets are created when investments are made with certain conditions pertaining to the maturity period and yield to maturity (also called the required rate of return).

02

Valuation and future cash flow

Valuation of any financial assets is basically to determine the present value of all returns from the assets at different points in time.

The returns at different points of time are called the future cash flow. So the present value of future cash flows is calculated first. Then the summation of all present values of such future flows is taken to determine the present value of any financial asset.

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Most popular questions from this chapter

Question: Sherwin Williams will receive \(18,500 a year for the next 25 years as a result of a picture he has painted. If a discount rate of 12 percent is applied, should he be willing to sell out his future rights now for \)165,000?

Question: Phil Goode will receive $175,000 in 50 years. His friends are very jealous of him. If the funds are discounted back at a rate of 14 percent, what is the present value of his future “pot of gold”?

If you invest $9,000 today, how much will you have

d. In 25 years at 14 percent (compounded semiannually)?

Carrie Tune will receive \(19,500 for the next 20 years as a payment for a new song she has written. If a 10 percent rate is applied, should she be willing to sell out her future rights now for \)160,000?

Cal Lury owes $10,000 now. A lender will carry the debt for five more years at 10 percent interest. That is, in this particular case, the amount owed will go up by10 percent per year for five years. The lender then will require that Cal pay off the loan over the next 12 years at 11 percent interest. What will his annual payment be?
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