CFA Level I · CFA Level I Exam · Real Estate and Infrastructure
An investor is evaluating a regulated water utility whose tariffs are set by a government regulator. The characteristic of this asset that most likely supports stable cash flows is:
The regulated water utility's monopoly position with inelastic demand most likely supports stable cash flows. Water is an essential service with no close substitutes, and regulated tariffs provide predictable revenue. Commodity price exposure or reliance on discretionary spending would make cash flows more volatile.
- Aits exposure to commodity price swings
- Bits monopoly position with inelastic demandCorrect
- Cits dependence on discretionary consumer spending
Explanation
Water utilities are typically natural monopolies with essential, price-inelastic demand and regulated returns, which makes cash flows stable and predictable. Commodity exposure and discretionary demand would increase volatility.
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