Question

Suppose the government proposes a relief package in an urgent attempt to bail out virtually all industries across the board and offset the economic damage unleashed by the 3-month long coronavirus [COVID−19] crisis episode, and indeed, keeps its promise.

Required: By approximately what factor [in the long-run] are businesses likely to discount their negative cash flows, to work out how much is needed to level their current losses?

Further Instructions:

• Generally, I expect to see ‘some kind’ of formula or general rule, without much emphasis on quantitative values.
• Remember, this is an essay question, so, please feel free to express yourself as you please

Answer 1

Based on past three recession data we can take a cumulative average and thus based in that businesses have discounted 33-45% of businesses as median in 3 months of economic slowdown and this calibrated view implies that businesses will have negative cash flows and losses surmounting to higher levels.

The S&P 500, Nasdaq100 both have rrached bottom in average of 513 days and have plunged by 60 percent on average and when that hapoens businesses too are discounted by 70 percent of value based on previous datasets.

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