Three financial factors that affect the value of a business

Question

Explain the three financial factors that affect the value of a business.

Answer 1

The three aspects that affect the worth of a firm's stock price are cash flow, timing, and risk.
a) The Importance of Cash Flow:  cash pays the bills in business. It is also what the firm receives in ex exchange for its products and services. Cash is therefore of critical importance, and the expectation that an organisation will generate cash in the future is one of the factors that gives the firm its value.
b) The Effect of Timing on Cash Flows:  Owners and potential investors look at when firms can expect to receive cash and when they can expect to pay out cash. All other factors being equal, the sooner companies expect to receive cash and the later they expect to pay out cash, the more valuable the firm and the higher its stock price will be.
c) The Influence of Risk:  Risk affects value because the less certain owners and investors are about a firm's expected future cash flows, the lower 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 short, companies whose expected future cash flows are doubtful will have lower values than companies whose expected future cash flows are virtually certain.