When determining the value of a firm, which of the following statements is true?
Investors are risk averse. Other things being equal, they prefer to pay more for stocks that are less risky and that have relatively more certain cash flows than other stocks.
Investors love risk. Other things being equal, they prefer to pay more for stocks that are riskier and have uncertain cash flows.
Investors are risk neutral. Other things being equal, they prefer to pay more for stocks that are less risky and have uncertain cash flows.
Based on your understanding of what determines a firm’s value, review the following:
What does the value of a firm depend on?
Option AThe firm’s ability to generate positive cash flows now and in the futureOption BThe firm’s past ability to generate positive cash flows
Which of the options is most accurate?
Option A
Option B
When determining the value of a firm, whic