Question

Explain how a firm's Intrinsic Value is calculated relative to a firm's risk and rate of return expected by its shareholders.

Answer 1

Firm intrinsic value is calculated related to firm risk because the cash flows have been discontinued using the the discounting rate at which is factoring into any kind of risk and they are trying to adjust that risk into the overall discounting factor so the net present value which is being allotted to the company is discounting that risk and it will be helpful in proactive determination of risk into the overall share price.

the rate of return is expected by the shareholder after ascertainment of various kinds of risk associated with the company and they are trying to demand a risk premium for higher risk and they are trying to adjust their expected rate of return accordingly so they will have a near to accurate intrinsic value which will help them in maximizing their overall rate of return from the company and they can also maximize upon the discrepancy of value and the price.