Chapter 20 DQ

Chapter 20 DQ - Chapter 20 Discussion Questions 1. Describe...

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Chapter 20 Discussion Questions 1. Describe the basic model used to determine the value of a firm. Value of firm= E(NCF 1 )/(1+k) 1 + E(NCF 2 )/(1+k) 2 + E(NCF n )/(1+k) n cost of capital (k)- the rate of return that investors are demanding to invest in the company 2. Does risk management impact a firm's cost of capital? Why or Why not? If risk management is going to help is either increase NCF or decrease cost of capital. Cost of capital = required rate of return = risk free rate + risk premium (unsystematic & systematic risk) US Treasury bill/bond are always been known as risk-free unsystematic risk (firm-specific risk) Systematic risk (market risk) not really use risk management to reduce risk to a rational investor 3. In what specific ways does risk management decrease a firm's expected cash flows? Be prepared to illustrate your answer with the following example: A firm expects its cash flows to be $100 per share, but there is a 10% chance of a loss equal to $30 per share(i.e. Cash flows would be reduced to $70 per share). Show the firm's expected
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Chapter 20 DQ - Chapter 20 Discussion Questions 1. Describe...

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