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Describe the three financial factors

List and described the three financial factors which influence the value of a business.

The three factors which affect the value of a firm's stock price are cash flow, timing, and risk.

The Importance of Cash Flow:  In any business, cash is what pays the bills. This is also what the firm receives in exchange for its products & services. Therefore, Cash is of ultimate importance, and the expectation which the firm will generate cash in the future is one of the factors which gives the firm its value.

The Effect of Timing on Cash Flows:  Owners & potential investors look at while firms can assume to attain cash and while they can expect to pay out cash. All other factors being equivalent, the sooner companies expect to obtain cash and the later they expect to pay out cash, the more valuable the firm and the higher its stock price will be.

The Influence of Risk:  Risk affects value since the less certain owners & investors are about a firm's expected future cash flows, the lesser they will value the company. The more certain owners and investors are about a firm's expected future cash flows, the higher they will value the company. In brief, companies whose expected future cash flows are uncertain will have lower values than companies whose supposed future cash flows are almost certain.

 

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