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 measured by three factors which are the :

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

These factor play an important role in determining value, and changes in any of these factors can affect the value.

For example, if we have expectations that the cash flows expected in the future is expected to increase then the value will increase. The timing of cash flows also play am important role in determining value. The cash flows which are expected sooner, will cause an increase in the value. Due to inflation and other risk that cause delay in receiving cash flows, can drive the value down as the cash flows which are expected have not been returned by the asset.