When considering the risk of receiving cash flows, financial managers must be aware that:
A)investors want higher returns for perceived greater risk.
B)investors want a lower valued firm to discourage future investors which might dilute their existing control.
C)investors expect dividends and capital gains regardless of the risks associated with achieving them.
D)investors always want lower returns so that the risk is minimized.

Question

Quizplus · Accepted Answer

Investors typically demand higher returns for perceived greater risk because they want to be compensated for taking on more risk. Financial managers must consider the level of risk associated with the cash flows they are considering and calculate a required rate of return that is appropriate for that level of risk. This rate of return should be attractive enough to entice investors to invest in the company, but not so high that it makes the company's investments unattractive or unfeasible.

When Considering the Risk of Receiving Cash Flows, Financial Managers