The discounted cash flow approach is useful for __________. a.) finding where an asset falls on the security market line

The discounted cash flow approach is useful for __________.

a.) finding where an asset falls on the security market line

b.) measuring an asset’s sensitivity to systematic risk

c.) determining whether an asset being considered for a portfolio offers a reasonable expected return for the risk

d.) considering existing and future resources to make optimal investment decision

Answer: d.) considering existing and future resources to make optimal investment decision

The discounted cash flow method is a good method to analyse both existing and new resources to enable the right decisions to be made with investments that will give the best payoff. Bellamy considered that one calculated the present value of an asset or an investment, by discounting the expected future cash flows with a suitable discount rate attached to it. The DCF analysis being all-inclusive enough to consider both risks and timing of future money inflows and add to the fact that it is converted into risk-appropriate cash flows, it enables investors to scrutinize any possible gains by weighing their resource availability against their set investment targets. Performing the DCF analysis is definitely one of the best ways to evaluate the soundness of the proposed investment by using cost of capital, growth rates, and projected cash flows, which are the main determinants of the attractiveness score of the investment.