Question

Which of the following statements is true regarding the factors affecting the value of cash flow?

1) More value is preferred to less
2) The sooner cash is received the more value it has
3) Less risky cash flows are more valuable than riskier cash flows
4) All of the above

Answer 1

The correct answer is 4) All of the above, which includes preferences for more value over less, sooner receipt of cash flows, and less risky cash flows being more valuable than risker ones.

Step-by-step explanation:

The true statement regarding the factors affecting the value of cash flow is: 4) All of the above. This includes the preference for more value over less, the higher value attributed to cash flows received sooner, and the increased worth of less risky cash flows over riskier ones. These principles are evident in various financial scenarios such as evaluating loans or investments.

• If a borrower has been late on loan payments, the risk associated with the loan repayment increases, diminishing its value.
• Changes in the interest rates can affect the attractiveness of a loan; generally, loans are less valuable if interest rates rise and more valuable if they fall, relative to the rate at which the loan was made.
• Loans to profitable firms are considered less risky, potentially worth more due to higher repayment confidence.