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SUMMARY

SUMMARY > Valuation is the process that links risk and return to determine the worth of an asset/security. The key inputs in the valuation process are expected returns (cash flows), their timing / pattern and the risk (required return). > The value of a security...

Combined Effect (Example)

EXAMPLE To illustrate the combined effect of the changes in the expected return and the required return in compute the value of the shares. Solution The net effect of the management decision which increased return (i.e. g from 7 to 9 per cent) as well as risk (i.e. K,...

Combined Effect

Combined Effect A financial decision typically affects both return and risk. Depending on the magnitude of change in these variables, the net effect on value can be assessed.

Changes in Risk (Example)

EXAMPLE Assume for the facts in that reflecting an increase  in risk the required rate increases 17 per cent. Compute the value of shares. Solution Thus, the value or shares has declined from Rs 33.3 to Rs 30 due to increase in the required return (K) without any...

Changes in Risk

Changes in Risk Any action by the financial manager that increases risk will also increase the required return. It will result in reduction in value. Any action that decreases risk would contribute to an increase in value.

Changes in Expected Return (Example)

EXAMPLE For the facts in Example 4.7, assuming that the expected rate of growth would increase from 7 to 9 per cent due to proposal to upgrade technology, compute the value of the share. Solution Thus, value of shares has increased from Rs 33.3 10 Rs 42.9. The...