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Unformatted text preview: Components of Valuation 1 Estimates of the size or volumes of the expected future cash flow returns which the asset is expected to generate, and the bigger the expected cash flows are the better. 2 Estimates of the timings of the future cash flows as this will also affect their respective values—the sooner cash flows are received the more valuable they will be. Cash flows may occur over any time period, days, weeks, months or years and their patterns may be regular or erratic. 3 An estimate of the investor’s required rate of return from the prospective investment. This is the minimum rate of return that will entice the investor to undertake an investment given its level of risk. Required rates of return, can be determined using the capital asset pricing model (CAPM).
8 Where Valuation Valuations are important simply because they form the basis for making decisions involving significant amounts of money or wealth transferred from one party to another. Valuations are normally done to: Buy or sell a stock of a publicly held firm. Buy or sell a privately held business. Determine how much estate tax (is a tax on one...
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