Risk Reduction by Multiple Evaluation Essay

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Cash Flow Valuation.” Answers (2008), it is a valuation method used to estimate the attractiveness of an investment opportunity. Discounted cash flow (DCF) analysis uses future free cash flow projections and discounts them (most often using the weighted average cost of capital) to arrive at a present value, which is used to evaluate the potential for investment. If the value arrived at through DCF analysis is higher than the current cost of the investment, the opportunity may be a good one. Calculated as: This valuation is a pertinent tool for getting the value of an asset but it has some disadvantages. For one it is not really possible to find the exact value of ones cash flow in the future especially in our times and it may take many trials and errors to come up with the best discount rate. The second valuation technique I’ve chosen to discuss is “Relative Valuation.” Wikipedia (2008), relative valuation is a generic term that refers to the notion of comparing the price of an asset to the market value of similar assets. In the field of securities investment, the idea has led to important practical tools, which could presumably spot pricing anomalies. These tools have subsequently become instrumental in enabling analysts and investors to make vital decisions on asset allocation. My final valuation technique is called the “Contingent Claim Valuation.” This technique values the stock based on the fact that the value of the asset may be greater than the present value of the expected cash flow if the cash flow is contingent on the occurrence or non occurrence of an event. A disadvantage of using this technique is its use of discounted cash flow may underestimate the value of the

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