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The fundamental valuation approach to business valuation uses basic accounting measures to assess the amount, timing and:

a.uncertainty of a firm’s future non-operating cash flows or earnings.
b.certainty of a firm’s future non-operating cash flows or earnings.
c.uncertainty of a firm’s future operating cash flows or earnings.
d.certainty of a firm’s past operating cash flows or earnings.

1 Answer

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Final answer:

The correct response is 'c. uncertainty of a firm’s future operating cash flows or earnings.' This is vital in the fundamental valuation approach which considers the risk factors tied to a firm's potential income through its core business activities, particularly for early-stage companies with limited financial history.

Step-by-step explanation:

The student's question pertains to the fundamental valuation approach to business valuation and seeks to identify the correct factor that is assessed alongside the amount and timing when using basic accounting measures. The correct answer to this question is c. uncertainty of a firm’s future operating cash flows or earnings. This approach considers the risk or uncertainty associated with a firm's future cash flows or earnings that are operational in nature. Newly established companies need to raise financial capital but face challenges due to the lack of a proven track record for profit.

Getting capital through early-stage investors, reinvesting profits, borrowing from banks or bonds, or selling stock are ways to finance these foresights. Nevertheless, the plight is that such firms often possess only an idea or prototype with minimal to no customer base, making the promise of future returns speculative. Hence, the uncertainty in their operating cash flows is a critical factor for valuation purposes.

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