Finance and Accounting Essay Example | Topics and Well Written Essays - 500 words

Finance and Accounting - Essay Example As the study presents derivative securities are financial instruments that have their value from the underlying assets. Such derivatives have different degrees of risks and therefore the certainty equivalent of cash flows can be computed by use simple multiple and based model where the cost of capital is used in finding both the current uncertain values of future uncertain cash flows. The research highlights both techniques are used in evaluation and estimation of the firms/company’s value. Additionally, both techniques use cash flows from the assets in their respective evaluations to find out the intrinsic value of the firm. Conversely, in discounted cash flow valuation, the purpose is to discover the value of assets, given their respective cash flows, growth rates and risk distinctiveness. In relative valuation, the purpose is to value assets, based upon how comparable assets are presently priced in the market. Private equity has been facing difficulties in valuing the private equity value as there have been different definitions of the fair value and inadequate/limited guidance in application of generally accepted accounting principles. Additionally, issues like financial crisis compel problems in valuation of private equity as the markets become unsteady hence triggering liquidity and placing stress on particular assets. Ineffective policies and procedu res used by managers regarding valuation of private equity bring about another problem in valuation.