An analyst noticed that an investee company's governance was worsening. To account for this, the analyst is most likely to increase:

Question

BlackTom AI · Accepted Answer

Worsening governance raises the firm-specific risk premium, so the analyst is most likely to increase the discount rate used in valuation.

1) Relevant concepts:
- Discount rate (required return) reflects risk: higher perceived risk → higher discount rate.
- Present value (PV) of future cash flows: PV = Σ CFt / (1 + r)^t. Holding cash flows constant, increasing r lowers PV (value).
- Corporate governance affects the probability of poor decisions, fraud, or expropriation, which increases investor risk and required return more directly than it increases expected cash flows.

2) Step-by-step reasoning:
- The analyst observes governance deterioration → investor perception of risk rises.
- To reflect higher risk in a DCF or other valuation model, the analyst raises the discount rate (or adds a governance risk premium).
- Raising the discount rate reduces the present value of projected cash flows, lowering the firm’s valuation.

3) Numerical illustration (intermediate steps):
- Suppose expected next-year cash flow CF1 = 100 and no growth for simplicity.
- With r = 10%: PV = 100 / (1 + 0.10) = 90.91.
- With r = 12% (after worsening governance): PV = 100 / (1 + 0.12) = 89.29.
- The higher discount rate reduces PV (90.91 → 89.29), demonstrating the impact.

4) Why the correct answer is correct:
- Governance is primarily a risk (quality of management/controls) factor. Valuation models capture increased risk by raising discount rates (or risk premiums). This is the most direct and standard adjustment an analyst makes to reflect worsened governance.

5) Why other options are incorrect:
- "The company's equity value": equity value is an outcome that will fall (not be increased) when governance worsens; analysts do not “increase” equity value to reflect worse governance.
- "The future cash flows from the company's operating activities": governance deterioration typically lowers confidence in forecasts and could reduce expected cash flows, but the more immediate and standard adjustment is to increase required returns (discount rates). Increasing future cash flows to reflect worse governance would be inappropriate.

Conclusion: Increasing the discount rates in the valuation model used to value the company is the correct response, matching the provided answer.

An analyst noticed that an investee company's governance was worsening. To account for this, the analyst is most likely to increase:单项选择题

类似问题

The market value of Caterpillar is 170$ per share, you perform valuation analysis with three methods. Which statement implies that future Caterpillar returns are expected to be higher than peer firms’?

When we valued Microsoft using DCF, we initially obtained a negative Firm value.

What does DCF stand for?

Which of the following trees corresponds to a potential parse of the ambiguous sentence below, with correct syntactic categories? Some diagnostics are provided.

Which of the following sentences contain two non-finite verbs? Select all that apply.

更多留学生实用工具

智能学习助手

风格化写作助手

论文查重助手

文献引用助手

课堂转译助手

课堂笔记助手

Quiz搜索助手

学校历年真题

智能刷题助手

智能匹配练习

希望你的学习变得更简单