Evaluate certainty equivalent coefficient, Financial Management

Assignment Help:

Q. Evaluate Certainty Equivalent Coefficient?

Illustration: - Presume the risky cash flow is Rs. 200000 and the riskless cash flow is Rs. 140000.

The Certainty Equivalent Coefficient =  140000 /  200000 = 0.7      

Steps occupied in Certainty Equivalent Coefficient Method: - The variety of steps involved in the certainty equivalent coefficient method is:

(1) First Step: - Initially the certainty comparable coefficient has to be calculated for each year of a project.

(2) Second Step: - Secondly the risk-adjusted cash flow of a project for every year has to be calculated. The risk-adjusted cash flow of a year is able to be calculated as follows:

Risk-Adjusted Cash Flow = Estimated Cash flow for the year X Certainty Equivalent Coefficient

(3) Third Step: - Thirdly we have to determine the present value of the capital project. The present value of the Capital Project is able to be found by adopting the following procedure. Initial the risk-adjusted cash flow for every year should be multiplied by the present value factor or discount factor applicable to that year to get the present value of the risk-adjusted cash flow of every year.

(4) Fourth Step: - Fourthly we have to conclude the net present value of the project. The net present value of the project will be

Present Value of the Project                                                   -----------

Less: Initial Investment on the Project                                   -----------

Net Present Value of the Project                                            -----------

 (5) Fifth Step: - Subsequent to the NPV of a project is calculated decision is taken as to the selection of the project.


Related Discussions:- Evaluate certainty equivalent coefficient

Participants in hedge funds-management company, The Manager or Management C...

The Manager or Management Company The firm sponsoring the Fund could often structure it as a management company. Its primary responsibility is to determine investment strategie

Start-up financing, Start-Up Financing Capital provided to companies wh...

Start-Up Financing Capital provided to companies which have been in operation for less than one year to facilitate all phases of bringing their product to market.

How can we measure total return- rate of return, How can we measure Total r...

How can we measure Total return- Measuring the Rate of Return Total return can be defined as: Total returns = (Cash payment received + Price change over the period) / Purcha

Rating methodologies of a debt instrument, The key parameters t...

The key parameters taken into account while rating a debt instrument are as follows: 1. Industry Evaluation - This involves an evaluation of the

What are the objectives or goals of financial management, What are the Obje...

What are the Objectives or goals of Financial Management? Objectives of Financial Management: - It is the responsibility of the top management to lay down the objectives or goa

Find out wacc, Directions: Use the information below to calculate the WACC...

Directions: Use the information below to calculate the WACC and its components for Hawk Corp. WACC= (%CE)(cost of CE) + (%PE)(cost of PE) + (%D)(cost of D)(1-T)

Gordon`s dividend capitalisation model , Considering the following informat...

Considering the following information, what is the price of the share as per Gordon’s Model? Details of the Company Net sales Rs.120 lakhs Net profit margin 12.5% Outstandi

Measuring yield curve risk, Rate duration can be defined as the sen...

Rate duration can be defined as the sensitivity of the change in value to a particular change in spot rate. Every point in a spot rate curve has a rate dura

Placement on career path, Placement on career path: The next step of t...

Placement on career path: The next step of the career planning process is to place an individual on a chosen career path. A career path is the logical possible sequence of pos

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd