Question

Value Determination. How is value measured? What are the three factors that determine value? How does each factor affect value?

Answer 1

Value is determined by three factors which are:

• expected future cash flows
• the timing of cash flows
• the risk that the cash flows are less than expected.

If the cash flows expected in the future increases , then the value increases.. The asset with certainty in expected cash flows is expected to generate a higher value than the the assets with uncertainty of expected cash flows. The assets which are expected to generate cash flows which are sooner than than the assets which provide delayed cash flows are expected to generate a higher value. As the expected time of receiving cash flows is stretched , certain external factors like inflation can also cause the value of the asset do be brought down. if there are risks, surrounding the cash flows which can reduce the expected cash floes in the future. this uncertainty brings the value of the asset down.