Question

The primary objective of the corporate management team is to maximize shareholder wealth. The company's board of directors and the shareholders evaluate and review managerial actions based on the growth in the value of the firm. Based on your understanding of what determines a firm's value, review the following: What does the value of a firm depend on? Option A The ability to generate cash flow that is available to distribute to the company's investors, including creditors and stockholders Option B The ability to generate cash flow that is available to distribute to the company's stockholders only Which of the options is most accurate? When determining the value of a firm, which of the following statements is true? A financial asset is considered to have value only if it is acquired at its market value. A financial asset is considered to have value only if it has the ability to generate positive cash flows. A financial asset is considered to have value only if it is acquired at its book price.

Answer 1

Option A:

Option A is most accurate since the value of a firm depends on its ability to generate cash flow that is available to distribute to the company's investors, including creditors and stockholders.

second part:

B.A financial asset is considered to have value only if it has the ability to generate positive cash flows.

A financial asset will have value only if it can generate future positive cash flows.

For valuation purposes the cost at which the asset is acquired is not relevant.

The ability of the asset to generate future cash flows is relevant for valuation purposes.