Certainty Equivalent Cash Flow - Revision history

Dirkjan at 19:23, 27 August 2020

2020-08-27T19:23:52Z

Dirkjan: Replaced content with "Certainty Equivalent Cash Flow Category:finance Category:M13 Category:Term"

2020-08-27T18:38:39Z

Replaced content with "Certainty Equivalent Cash Flow Category:finance Category:M13 Category:Term"

Dirkjan: Created page with "In Entrepreneurial Finance the Certainty Equivalent Cash Flow or CEQ is defined as a common method of estimating Present Value...."

2020-08-25T07:39:38Z

Created page with "In Entrepreneurial Finance the Certainty Equivalent Cash Flow or CEQ is defined as a common method of estimating Present Value...."

New page

In [[Entrepreneurial Finance|Entrepreneurial Finance]] the Certainty Equivalent Cash Flow or CEQ is defined as a common method of estimating [[Present Value|Present Value]]. The second common method mentioned is the [[Risk Adjusted Discount Rate|Risk Adjusted Discount Rate]]. In the CEQ method instead of adjusting the discount rate (which is done in the [[RADR|RADR]]) the risk adjustment is made directly to the cash flow. After that the risk-adjusted or, better in this case the '''certainty equivalent''' cash flow is converted to [[Present Value|Present Value]] by discounting at the risk free rate. Thus, if:

<math>C_{jt}</math> is the expected future cash flow of asset <math>j</math> at time <math>t</math> the certainty equivalent cash flow <math>CE(C_{jt})</math> can be described as follows:

<math>CE(C_{jt})</math> <math>=</math> <math>C_{jt} - RD_{jt}</math>

Where:
<math>RD_{jt}</math> is the dollar valued discount to <math>C_{jt}</math> that is required to convert the risky expected cash flow to its certainty equivalent.

Certainty Equivalent Cash Flow (CEQ) is:

<math>PV</math> - <math>\sum{\frac{C_t-RD_r}{(1+r_{pt})^t}}</math>

Issues:
* What cash flows should be valued?
* How risky cash flows adjusted to their certainty equivalents?
* What is the discount rate for valuing certain future cash flows?
[[Category:finance]]

[[Category:M13]]

[[Category:Term]]

← Older revision		Revision as of 18:38, 27 August 2020
Line 1:		Line 1:
−	~~In [[Entrepreneurial Finance\|Entrepreneurial Finance]] the~~ Certainty Equivalent Cash Flow or CEQ is defined as a common method of estimating [[Present Value\|Present Value]]. The second common method mentioned is the [[Risk Adjusted Discount Rate\|Risk Adjusted Discount Rate]]. In the CEQ method instead of adjusting the discount rate (which is done in the [[RADR\|RADR]]) the risk adjustment is made directly to the cash flow. After that the risk-adjusted or, better in this case the '''certainty equivalent''' cash flow is converted to [[Present Value\|Present Value]] by discounting at the risk free rate. Thus, if:	+	Certainty Equivalent Cash Flow
−
−	~~<math>C_{jt}</math> is the expected future cash flow of asset <math>j</math> at time <math>t</math> the certainty equivalent cash flow <math>CE(C_{jt})</math> can be described as follows:~~
−
−	~~<math>CE(C_{jt})</math> <math>=</math> <math>C_{jt} - RD_{jt}</math>~~
−
−	~~Where:~~
−	~~<math>RD_{jt}</math> is the dollar valued discount to <math>C_{jt}</math> that is required to convert the risky expected cash flow to its certainty equivalent.~~
−
−	~~Certainty Equivalent Cash Flow (CEQ) is:~~
−
−	~~<math>PV</math> - <math>\sum{\frac{C_t-RD_r}{(1+r_{pt})^t}}</math>~~
−
−	~~Issues:~~
−	* What cash flows should be valued?
−	* How risky cash flows adjusted to their certainty equivalents?
−	* What is the discount rate for valuing certain future cash flows?
	[[Category:finance]]		[[Category:finance]]

← Older revision		Revision as of 19:23, 27 August 2020
Line 1:		Line 1:
−	Certainty Equivalent Cash Flow	+	In [[Entrepreneurial Finance\|Entrepreneurial Finance]] the Certainty Equivalent Cash Flow or CEQ is defined as a common method of estimating [[Present Value\|Present Value]]. The second common method mentioned is the [[Risk Adjusted Discount Rate\|Risk Adjusted Discount Rate]]. In the CEQ method instead of adjusting the discount rate (which is done in the [[RADR\|RADR]]) the risk adjustment is made directly to the cash flow. After that the risk-adjusted or, better in this case the '''certainty equivalent''' cash flow is converted to [[Present Value\|Present Value]] by discounting at the risk free rate. Thus, if:
		+
		+	<math>C_{jt}</math> is the expected future cash flow of asset <math>j</math> at time <math>t</math> the certainty equivalent cash flow <math>CE(C_{jt})</math> can be described as follows:
		+
		+	<math>CE(C_{jt})</math> <math>=</math> <math>C_{jt} - RD_{jt}</math>
		+
		+	Where:
		+	<math>RD_{jt}</math> is the dollar valued discount to <math>C_{jt}</math> that is required to convert the risky expected cash flow to its certainty equivalent.
		+
		+	Certainty Equivalent Cash Flow (CEQ) is:
		+
		+	<math>PV</math> - <math>\sum{\frac{C_t-RD_r}{(1+r_{pt})^t}}</math>
		+
		+	Issues:
		+	* What cash flows should be valued?
		+	* How risky cash flows adjusted to their certainty equivalents?
		+	* What is the discount rate for valuing certain future cash flows?
	[[Category:finance]]		[[Category:finance]]