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1. How is valuation of any financial asset related to future cash flows?
2. Why might investors demand a lower rate of return for an investment in ExxonMobil as compared to United Airlines?
3. What are the three factors that influence the required rate of return by investors?
4. If inflationary expectations increase, what is likely to happen to yield to maturity on bonds in the marketplace? What is also likely to happen to the price of the bonds?
5. Why is the remaining time to maturity an important factor in evaluating the impact of a change in yield to maturity on bond prices?
6. What are the three adjustments that have to be made in going from manual to semiannual bond analysis?
7. Why is a change in required yield for preferred stock likely to have a greater impact on price than a change in required yield for bonds?
8. What type of dividend pattern for common stock is similar to the dividend payment for preferred stock?
9. What two components make up the required rate of return on common stock?
10. What factors might influence a firm's price-earnings ratio?
11. How is the supernormal growth pattern likely to vary from the normal, constant growth pattern?
12. What approaches can be taken in valuing a form's stock when there is no cash dividend payment?

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

Financial assets include several varieties:

Debt
Equities
Hybrids
Derivatives

Whatever the particular variety, we can think of financial assets simply as the right to a future cash flow stream and/or physical asset. All types of asset eg debt, equity etc can be reduced to a stream of cash flows that can be valued.

When valuing a stream of cash flows we need to consider two things: a) time value of money b) riskiness of the cash flows c) expected value of the cash flows

2. Why might investors demand a lower rate of return for an investment in ExxonMobil as compared to United Airlines?

Because Exxon Mobil is perceived as a safer company as compared to United airlines. In other words, the risk associated with investment in United airlines is higher.

3. What are the three factors that influence the required rate of return by investors?

The time value of money during the investment period
Expected rate of inflation during the investment period
Risk involved

4. If inflationary expectations increase, what is likely to happen to yield to maturity on bonds in the marketplace? What is also likely to happen to the price of the bonds?

Rates rise in such a situation while price of the bonds decrease.

5. Why is ...

Solution Summary

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

$2.19
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