Valuation based on decision tree analysis (DTA )should discount both components of the contingent cash flows using the risk-free rate.

Question

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In decision tree analysis (DTA), the expected cash flows are typically discounted at a risk-adjusted discount rate to account for the risk associated with those cash flows, rather than using the risk-free rate for both components. The risk-free rate is generally used for risk-free cash flows, while riskier cash flows are discounted at higher rates to reflect their risk.

Valuation Based on Decision Tree Analysis (DTA )Should Discount Both