Give two reasons why stockholders might be indifferent between owning the stock of a firm with volatile cash flows and that of a firm with stable cash flows.

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Give two reasons why stockholders might be indifferent between owning the stock of a firm with volatile cash flows and that of a firm with stable cash flows.

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Give two reasons why stockholders might be indifferent between owning the stock of a firm with volatile cash flows and that of a firm with stable cash flows.

Explanation & AnswerSolution by a verified expert

Explanation

1. When the company uses proper risk management techniques
In situations where the company uses proper risk management techniques it can reduce or even eliminate the volatility of the company's cash flows in future together with its weighted average cost of capital
2. Derivative techniques
When the investors use derivative techniques, it can lead to indifference by diversifying their portfolio

Answer

1. When the company uses proper risk management techniques
2. Derivative techniques

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