The value of the cash flows that the assets of a firm are expected to generate must equal
A) the value of the cash flows claimed by the equity investors.
B) the value of the cash flows claimed by the debt investors.
C) the value of the cash flows claimed by both the equity and debt investors.
D) the revenue produced by the firm.

Question

Quizplus · Accepted Answer

The value of the cash flows from the assets of a firm must be enough to satisfy both the equity and debt investors since they both have a claim on those cash flows. If the cash flows generated are not sufficient to meet the claims of both equity and debt investors, the firm may become insolvent or default on its debt obligations. Therefore, it is crucial for firms to ensure that their assets generate sufficient cash flows to meet the claims of both types of investors. Option A and B are incorrect because the cash flows from assets should be enough for both equity and debt investors, not just one of them. Option D is incorrect because revenue alone does not reflect the profitability of the firm or the ability of its assets to generate cash flows.

The Value of the Cash Flows That the Assets of a Firm