Risk, Real Options and Capital Budgeting.pptMeghnaPurohit2
This document outlines key concepts related to risk analysis, real options, and capital budgeting. It covers topics like sensitivity analysis, Monte Carlo simulation, real options, and decision trees. Specific examples are provided, such as evaluating a pharmaceutical company's decision to invest $1 billion in testing a potential cure for the common cold. Break-even analyses are also demonstrated to determine the revenue and price needed for projects to reach the break-even point.
This document discusses using discounted cash flow analysis to make investment decisions. It covers topics such as identifying and calculating cash flows, using cash flows rather than accounting profits, using incremental cash flows, treating inflation, and separating investment and financing decisions. An example project for Blooper Industries is presented, showing the capital investment, revenues, expenses, taxes, depreciation, cash flows from operations, and net cash flows over several years to calculate the net present value.
1) Sensitivity analysis, scenario analysis, break-even analysis, and simulation are risk analysis techniques used to evaluate how uncertain variables might impact project outcomes. They allow examining forecasts and estimates in more depth than a single NPV calculation.
2) Real options, such as the option to expand, abandon, or delay a project, can provide additional value beyond traditional NPV. They should be considered in capital budgeting.
3) Decision trees provide a graphical way to represent alternative decisions and outcomes over time, helping to identify the best course of action for a project under uncertainty.
This chapter discusses various strategic and analytical tools for evaluating projects using net present value (NPV). It introduces corporate strategy and how positive NPV projects should increase share prices. Decision trees are presented as a way to model sequential decisions under uncertainty. Sensitivity analysis, scenario analysis, and break-even analysis allow examining how sensitive NPV is to changes in assumptions. Options related to projects, like expanding or delaying, are discussed as having value not captured in basic NPV calculations. The chapter concludes that a project's market value equals its NPV plus the value of embedded managerial flexibility options.
This document discusses various capital budgeting techniques for analyzing investment projects under uncertainty, including sensitivity analysis, scenario analysis, break even analysis, and real options analysis. It provides examples of how to apply these techniques to evaluate projects. Sensitivity analysis involves changing assumptions like sales, costs, and investments to see their impact on NPV. Scenario analysis evaluates projects under different combinations of assumptions. Break even analysis finds the sales level where costs and revenues break even. Real options analysis uses decision trees to value the flexibility inherent in investment opportunities.
The document is a chapter from a corporate finance textbook that discusses various methods for valuing stocks, including the dividend discount model and constant growth dividend discount model. It also covers the efficient market hypothesis and random walk theory, which suggest that stock price movements cannot be predicted from past trends and reflect all available information.
The document summarizes key concepts from Chapter 7 of a corporate finance textbook, including net present value (NPV), internal rate of return (IRR), mutually exclusive projects, and investment timing. It provides examples and formulas for calculating NPV and IRR. The key investment decision rules are to accept projects with a positive NPV and projects with an IRR higher than the opportunity cost of capital. When choosing between mutually exclusive projects, select the project with the highest positive NPV. For investment timing, defer investments if doing so lowers costs in present value terms.
This document summarizes key concepts related to the time value of money, including future values, present values, perpetuities, annuities, inflation, and effective interest rates. It provides examples and formulas for calculating future values, present values, perpetuities, annuities, real interest rates, and effective annual interest rates. The document is from Chapter 4 of a corporate finance textbook and covers topics such as compound interest, discount rates, discount factors, and applications related to the time value of money.
Risk, Real Options and Capital Budgeting.pptMeghnaPurohit2
This document outlines key concepts related to risk analysis, real options, and capital budgeting. It covers topics like sensitivity analysis, Monte Carlo simulation, real options, and decision trees. Specific examples are provided, such as evaluating a pharmaceutical company's decision to invest $1 billion in testing a potential cure for the common cold. Break-even analyses are also demonstrated to determine the revenue and price needed for projects to reach the break-even point.
This document discusses using discounted cash flow analysis to make investment decisions. It covers topics such as identifying and calculating cash flows, using cash flows rather than accounting profits, using incremental cash flows, treating inflation, and separating investment and financing decisions. An example project for Blooper Industries is presented, showing the capital investment, revenues, expenses, taxes, depreciation, cash flows from operations, and net cash flows over several years to calculate the net present value.
1) Sensitivity analysis, scenario analysis, break-even analysis, and simulation are risk analysis techniques used to evaluate how uncertain variables might impact project outcomes. They allow examining forecasts and estimates in more depth than a single NPV calculation.
2) Real options, such as the option to expand, abandon, or delay a project, can provide additional value beyond traditional NPV. They should be considered in capital budgeting.
3) Decision trees provide a graphical way to represent alternative decisions and outcomes over time, helping to identify the best course of action for a project under uncertainty.
This chapter discusses various strategic and analytical tools for evaluating projects using net present value (NPV). It introduces corporate strategy and how positive NPV projects should increase share prices. Decision trees are presented as a way to model sequential decisions under uncertainty. Sensitivity analysis, scenario analysis, and break-even analysis allow examining how sensitive NPV is to changes in assumptions. Options related to projects, like expanding or delaying, are discussed as having value not captured in basic NPV calculations. The chapter concludes that a project's market value equals its NPV plus the value of embedded managerial flexibility options.
This document discusses various capital budgeting techniques for analyzing investment projects under uncertainty, including sensitivity analysis, scenario analysis, break even analysis, and real options analysis. It provides examples of how to apply these techniques to evaluate projects. Sensitivity analysis involves changing assumptions like sales, costs, and investments to see their impact on NPV. Scenario analysis evaluates projects under different combinations of assumptions. Break even analysis finds the sales level where costs and revenues break even. Real options analysis uses decision trees to value the flexibility inherent in investment opportunities.
The document is a chapter from a corporate finance textbook that discusses various methods for valuing stocks, including the dividend discount model and constant growth dividend discount model. It also covers the efficient market hypothesis and random walk theory, which suggest that stock price movements cannot be predicted from past trends and reflect all available information.
The document summarizes key concepts from Chapter 7 of a corporate finance textbook, including net present value (NPV), internal rate of return (IRR), mutually exclusive projects, and investment timing. It provides examples and formulas for calculating NPV and IRR. The key investment decision rules are to accept projects with a positive NPV and projects with an IRR higher than the opportunity cost of capital. When choosing between mutually exclusive projects, select the project with the highest positive NPV. For investment timing, defer investments if doing so lowers costs in present value terms.
This document summarizes key concepts related to the time value of money, including future values, present values, perpetuities, annuities, inflation, and effective interest rates. It provides examples and formulas for calculating future values, present values, perpetuities, annuities, real interest rates, and effective annual interest rates. The document is from Chapter 4 of a corporate finance textbook and covers topics such as compound interest, discount rates, discount factors, and applications related to the time value of money.
This document provides an overview of discounted cash flow valuation and the time value of money. It discusses key concepts such as future value, present value, and net present value in single-period and multi-period contexts. Formulas are provided for calculating future value, present value, and net present value of cash flows given an interest rate. The effects of compounding on future values over multiple periods are demonstrated. Examples calculate future and present values for a variety of cash flow scenarios.
The documents discuss developing a new strategic decision-making framework that can withstand volatility. It proposes splitting value drivers into market drivers and model drivers to provide stability. A key part of the framework is understanding the full return exposure, including downside and upside, rather than single-point forecasts. It also emphasizes identifying and utilizing options within investment, operating, and ownership models to influence return exposure. Testing potential return outcomes under different scenarios is presented as an important way to apply the framework and understand the impact of strategic decisions.
This document outlines key concepts from a chapter on financial statement analysis and long-term planning. It discusses standardizing financial statements, computing and interpreting ratios, developing long-term financial plans using the percentage of sales approach, and how capital structure and dividend policies affect growth. Specific topics covered include ratio analysis, the DuPont identity, time-trend and peer analysis, internal and sustainable growth rates, and determinants of growth.
This document contains excerpts from a textbook on capital budgeting decisions. It discusses several key concepts in capital budgeting including screening decisions versus preference decisions, the time value of money, net present value analysis, internal rate of return, discount rates, and examples of how to calculate net present value and internal rate of return for capital budgeting projects. Worked examples are provided to illustrate how to use net present value and internal rate of return to evaluate potential capital investments.
The document provides an overview of discounted cash flow valuation and time value of money concepts. It discusses key concepts like future value, present value, and net present value in single and multi-period contexts. It also covers effective annual rates of interest for investments with compounding periods other than annual, and the use of financial calculators to solve time value problems. The chapter outlines valuation approaches and provides examples of computing future and present values for cash flows occurring at different points in time.
The document provides an overview of discounted cash flow valuation and time value of money concepts. It discusses key concepts like future value, present value, and net present value in single and multi-period contexts. It also covers effective annual rates of interest for investments with compounding periods other than annual, and the use of financial calculators to solve time value problems. The chapter outlines valuation approaches and provides examples of computing future and present values for cash flows over time.
AgendaComprehending risk when modeling investment (project) de.docxgalerussel59292
Agenda
Comprehending risk when modeling investment (project) decisions
Standalone Risk
Market Risk
1
1
Project Risk
Standalone Risk: Risk based on uncertainty of a projects cash flows
Sensitivity
Scenarios
Breakeven
Simulations
Market Risk: Risk of the project as seen by a well diversified investor
Beta
2
Sensitivity, Scenario, and Break-Even
Each allows us to look behind the NPV number to see how stable our estimates are.
Breakeven: sales required to breakeven
Accounting break-even: sales volume at which net income = 0
Cash break-even: sales volume at which operating cash flow = 0
Financial break-even: sales volume at which net present value = 0
Sensitivity: how sensitive a particular NPV calculation is to changes in an input variable holding all other assumptions are held constant
Scenario: examine impact on NPV given a confluence of factors
When working with spreadsheets, try to build your model so that you can adjust variables in a single cell and have the NPV calculations update accordingly.
3
3
Monte Carlo Simulation
A more sophisticated variation of the scenario analysis is Monte Carlo simulation.
In a Monte Carlo simulation, analysts specify a range or a distribution of potential outcomes for each of the model’s assumptions.
Pick a probability distribution for each input variable (units, price, variable costs, etc).
The computer program will pick a random value from each input variable, calculate the NPV and store the result. This is a trial.
Repeat the process many times, saving the input variables and the output (NPV).
End result: Probability distribution of NPV based on sample of simulated values.
4
Example
5
6
When a firm with both debt and equity invests in an asset similar to its existing assets (business), the WACC is the appropriate discount rate to use in NPV calculations.
In conglomerates, the WACC reflects the return that the firm must earn on average across all its assets to satisfy investors, but using the WACC to discount cash flows of a particular investment leads to mistakes.
Any project’s cost of capital depends on the use to which the capital is being put—not the source.
Therefore, it depends on the risk of the project and not the risk of the company.
When a firm invests in an asset that is different from its existing assets, it should look for pure-play firms to find the right discount rate.
6
Finding the Right Discount Rate
6
You are a financial analyst at General Electric and are preparing a cost of equity estimate for a project analysis using NPV:
CAPM = Risk Free Rate + Beta * Market Risk Premium
9.5% = 3.0% + 1.1 * 5.9%
Lines of Business
Financial Services
Power Generation
Aviation
Transportation
Health Care
Consumer Goods
When evaluating a new power generation investment for GE, which cost of capital should be used?
Capital Budgeting & Project Risk
7
Beta
1.8
0.6
1.2
1.3
0.8
1.1
7
17
Capital Budgeti.
The document discusses decision trees, sensitivity analysis, scenario analysis, and break-even analysis as tools for analyzing net present value calculations. It provides an example of using a decision tree to evaluate whether a pharmaceutical company should invest in testing and developing a potential new drug. Sensitivity analysis on the example shows NPV is highly sensitive to changes in revenue. Scenario analysis and break-even analysis are also discussed as ways to examine variability in forecasts.
This document discusses an initiative by Industreams Ltd to explore better ways of working with and gaining value from volatility in port and infrastructure investments. It acknowledges that precise forecasting is limited and payoffs are distributed over a wide range rather than single points. It introduces exploring a "payoff function" approach to understand how business model factors translate market variability into payoff outcomes. A case study demonstrates how understanding this can substantially shift a project's potential payoff distribution through options that limit downside risk and increase upside potential. The goal is to embrace variability and create robustness and upside in asset values through the payoff function.
The document discusses several capital budgeting techniques: sensitivity analysis, which examines how changes in assumptions impact NPV; scenario analysis, which considers multiple forecasts simultaneously; and break-even analysis, which determines the sales needed to cover costs. It also discusses real options, noting that NPV underestimates a project's value since managers can adjust in response to changes. Decision trees are presented as a tool to analyze projects with uncertain outcomes.
The document discusses several capital budgeting techniques: sensitivity analysis, which examines how changes in assumptions impact NPV; scenario analysis, which considers multiple forecasts simultaneously; and break-even analysis, which determines the sales needed to cover costs. It also discusses real options, noting that NPV underestimates a project's value since managers can adjust in response to changes. Decision trees are presented as a tool to analyze projects with uncertain outcomes.
Parametric provides strategies for exploiting increased market volatility, including rebalancing portfolios and using options strategies. Rebalancing reduces concentration risks and volatility over time by selling assets that have increased in value and buying those that have decreased, capturing returns from volatility. Options strategies can also provide downside protection for portfolios while retaining upside potential. Parametric implemented an options overlay for a client in 2008 that protected against a 5-20% market decline while retaining upside to 30%, balancing protection and participation in gains.
Exceptional Stock Market returns in Turbulent TimesAtul Khekade
This paper discusses historic patterns of Micro and Macro decisions and environment where the stocks have fetched exceptional returns in spite of the turbulent economic environment.
This document provides information about Monte Carlo analysis, a financial forecasting method used to project the probability of achieving financial goals while accounting for investment return volatility. It explains that Monte Carlo simulations generate thousands of potential outcomes based on variables like historical asset class returns and their standard deviations. The summary provides an overview of how Monte Carlo analysis can help evaluate the likelihood of different investment strategies meeting retirement needs and goals.
This chapter discusses market risk and its measurement. It provides examples of how major trading losses at banks like Barings and Sumitomo occurred due to poor risk management. It then outlines approaches to measuring market risk exposure, including dollar value exposure, RiskMetrics, historical simulation, and Monte Carlo simulation. Regulators set capital requirements based on measures of market risk to ensure banks hold sufficient capital to cover potential losses.
Monte Carl Simulation is a powerful and effective tool when used properly helps to navigate the expected Net Present Value NPV. This presentation helps to improve the pattern to ackowlege onthe Odessa Investment by Decision Dres.
!JWI 531 Financial Management II Week Four Lec.docxkatherncarlyle
!
JWI 531
Financial Management II
Week Four | Lecture Two
!
!
Please note that this basic version of the lecture is provided as a convenience for the student, and may be
missing interactive materials throughout. Students are still responsible for reviewing the missing
materials - including audio, video, and interactive widgets - that are found in the full lecture.
- Page
-1
ADDITIONAL VALUATION
TECHNIQUES: SENSITIVITY ANALYSIS
AND DECISION TREES
!
In the digital age, businesses are deluged with data. Sophisticated
tools are abundant. Until recently, however, the financial world’s
wizardry seemed invincible. Recent events have significantly
changed that perception.
But a few complex techniques still remain unblemished. Sensitivity
analysis and decision trees, in particular, can help you manage
uncertainty about the future. And businesses today have learned to
live with a high degree of uncertainty.
The assets companies own will eventually reveal their full,
productive capacity. The key word is eventually. You won’t know just
how valuable an entity or a project is until that time comes.
Since you know you’re going to be wrong at some point, what can
you do about it? Not much, except to minimize the damage and
incorporate uncertainty into your decision-making processes.
- Page
-2
HOW TO BE GOOD AT BEING WRONG
The greatest value of sensitivity analysis is that it quickly shows you
just how wrong your valuation estimate can be and still be OK.
When you’re investing precious resources into a project or a
business, you’ll definitely want to know what will happen should
things turn out worse or better than expected.
Simply stated, sensitivity analysis studies multiple scenarios. You
create a range of excessively negative and positive situations
(including the most likely scenario in between) and adjust a limited
number of key variables like discount and growth rates. You then
compare all these scenarios. The purpose is to reveal how sensitive a
model is to fluctuations in one direction or another. Because
valuation is an imperfect science, financial decision-makers
desperately want to know the margin of error they have if
something goes wrong.
The most basic approach in the sensitivity-analysis tool kit is simple
data entry—substituting different figures into your formulas and
models and seeing what you get. When doing your analysis of
discounted cash flow, net present value, or internal rate of return,
the easiest way to incorporate sensitivity analysis is to make a table
with long-term growth figures as column values and various
discount rates as row values. (You can select other relevant inputs,
- Page
-3
but whichever you choose, make sure you’re focusing on those that
have the most influence over the outcome.) Changing these
variables can show you how a small movement can vastly alter the
expected intrinsic value of an investment.
L ...
Company Valuation webinar series - Tuesday, 4 June 2024FelixPerez547899
This session provided an update as to the latest valuation data in the UK and then delved into a discussion on the upcoming election and the impacts on valuation. We finished, as always with a Q&A
This document provides an overview of discounted cash flow valuation and the time value of money. It discusses key concepts such as future value, present value, and net present value in single-period and multi-period contexts. Formulas are provided for calculating future value, present value, and net present value of cash flows given an interest rate. The effects of compounding on future values over multiple periods are demonstrated. Examples calculate future and present values for a variety of cash flow scenarios.
The documents discuss developing a new strategic decision-making framework that can withstand volatility. It proposes splitting value drivers into market drivers and model drivers to provide stability. A key part of the framework is understanding the full return exposure, including downside and upside, rather than single-point forecasts. It also emphasizes identifying and utilizing options within investment, operating, and ownership models to influence return exposure. Testing potential return outcomes under different scenarios is presented as an important way to apply the framework and understand the impact of strategic decisions.
This document outlines key concepts from a chapter on financial statement analysis and long-term planning. It discusses standardizing financial statements, computing and interpreting ratios, developing long-term financial plans using the percentage of sales approach, and how capital structure and dividend policies affect growth. Specific topics covered include ratio analysis, the DuPont identity, time-trend and peer analysis, internal and sustainable growth rates, and determinants of growth.
This document contains excerpts from a textbook on capital budgeting decisions. It discusses several key concepts in capital budgeting including screening decisions versus preference decisions, the time value of money, net present value analysis, internal rate of return, discount rates, and examples of how to calculate net present value and internal rate of return for capital budgeting projects. Worked examples are provided to illustrate how to use net present value and internal rate of return to evaluate potential capital investments.
The document provides an overview of discounted cash flow valuation and time value of money concepts. It discusses key concepts like future value, present value, and net present value in single and multi-period contexts. It also covers effective annual rates of interest for investments with compounding periods other than annual, and the use of financial calculators to solve time value problems. The chapter outlines valuation approaches and provides examples of computing future and present values for cash flows occurring at different points in time.
The document provides an overview of discounted cash flow valuation and time value of money concepts. It discusses key concepts like future value, present value, and net present value in single and multi-period contexts. It also covers effective annual rates of interest for investments with compounding periods other than annual, and the use of financial calculators to solve time value problems. The chapter outlines valuation approaches and provides examples of computing future and present values for cash flows over time.
AgendaComprehending risk when modeling investment (project) de.docxgalerussel59292
Agenda
Comprehending risk when modeling investment (project) decisions
Standalone Risk
Market Risk
1
1
Project Risk
Standalone Risk: Risk based on uncertainty of a projects cash flows
Sensitivity
Scenarios
Breakeven
Simulations
Market Risk: Risk of the project as seen by a well diversified investor
Beta
2
Sensitivity, Scenario, and Break-Even
Each allows us to look behind the NPV number to see how stable our estimates are.
Breakeven: sales required to breakeven
Accounting break-even: sales volume at which net income = 0
Cash break-even: sales volume at which operating cash flow = 0
Financial break-even: sales volume at which net present value = 0
Sensitivity: how sensitive a particular NPV calculation is to changes in an input variable holding all other assumptions are held constant
Scenario: examine impact on NPV given a confluence of factors
When working with spreadsheets, try to build your model so that you can adjust variables in a single cell and have the NPV calculations update accordingly.
3
3
Monte Carlo Simulation
A more sophisticated variation of the scenario analysis is Monte Carlo simulation.
In a Monte Carlo simulation, analysts specify a range or a distribution of potential outcomes for each of the model’s assumptions.
Pick a probability distribution for each input variable (units, price, variable costs, etc).
The computer program will pick a random value from each input variable, calculate the NPV and store the result. This is a trial.
Repeat the process many times, saving the input variables and the output (NPV).
End result: Probability distribution of NPV based on sample of simulated values.
4
Example
5
6
When a firm with both debt and equity invests in an asset similar to its existing assets (business), the WACC is the appropriate discount rate to use in NPV calculations.
In conglomerates, the WACC reflects the return that the firm must earn on average across all its assets to satisfy investors, but using the WACC to discount cash flows of a particular investment leads to mistakes.
Any project’s cost of capital depends on the use to which the capital is being put—not the source.
Therefore, it depends on the risk of the project and not the risk of the company.
When a firm invests in an asset that is different from its existing assets, it should look for pure-play firms to find the right discount rate.
6
Finding the Right Discount Rate
6
You are a financial analyst at General Electric and are preparing a cost of equity estimate for a project analysis using NPV:
CAPM = Risk Free Rate + Beta * Market Risk Premium
9.5% = 3.0% + 1.1 * 5.9%
Lines of Business
Financial Services
Power Generation
Aviation
Transportation
Health Care
Consumer Goods
When evaluating a new power generation investment for GE, which cost of capital should be used?
Capital Budgeting & Project Risk
7
Beta
1.8
0.6
1.2
1.3
0.8
1.1
7
17
Capital Budgeti.
The document discusses decision trees, sensitivity analysis, scenario analysis, and break-even analysis as tools for analyzing net present value calculations. It provides an example of using a decision tree to evaluate whether a pharmaceutical company should invest in testing and developing a potential new drug. Sensitivity analysis on the example shows NPV is highly sensitive to changes in revenue. Scenario analysis and break-even analysis are also discussed as ways to examine variability in forecasts.
This document discusses an initiative by Industreams Ltd to explore better ways of working with and gaining value from volatility in port and infrastructure investments. It acknowledges that precise forecasting is limited and payoffs are distributed over a wide range rather than single points. It introduces exploring a "payoff function" approach to understand how business model factors translate market variability into payoff outcomes. A case study demonstrates how understanding this can substantially shift a project's potential payoff distribution through options that limit downside risk and increase upside potential. The goal is to embrace variability and create robustness and upside in asset values through the payoff function.
The document discusses several capital budgeting techniques: sensitivity analysis, which examines how changes in assumptions impact NPV; scenario analysis, which considers multiple forecasts simultaneously; and break-even analysis, which determines the sales needed to cover costs. It also discusses real options, noting that NPV underestimates a project's value since managers can adjust in response to changes. Decision trees are presented as a tool to analyze projects with uncertain outcomes.
The document discusses several capital budgeting techniques: sensitivity analysis, which examines how changes in assumptions impact NPV; scenario analysis, which considers multiple forecasts simultaneously; and break-even analysis, which determines the sales needed to cover costs. It also discusses real options, noting that NPV underestimates a project's value since managers can adjust in response to changes. Decision trees are presented as a tool to analyze projects with uncertain outcomes.
Parametric provides strategies for exploiting increased market volatility, including rebalancing portfolios and using options strategies. Rebalancing reduces concentration risks and volatility over time by selling assets that have increased in value and buying those that have decreased, capturing returns from volatility. Options strategies can also provide downside protection for portfolios while retaining upside potential. Parametric implemented an options overlay for a client in 2008 that protected against a 5-20% market decline while retaining upside to 30%, balancing protection and participation in gains.
Exceptional Stock Market returns in Turbulent TimesAtul Khekade
This paper discusses historic patterns of Micro and Macro decisions and environment where the stocks have fetched exceptional returns in spite of the turbulent economic environment.
This document provides information about Monte Carlo analysis, a financial forecasting method used to project the probability of achieving financial goals while accounting for investment return volatility. It explains that Monte Carlo simulations generate thousands of potential outcomes based on variables like historical asset class returns and their standard deviations. The summary provides an overview of how Monte Carlo analysis can help evaluate the likelihood of different investment strategies meeting retirement needs and goals.
This chapter discusses market risk and its measurement. It provides examples of how major trading losses at banks like Barings and Sumitomo occurred due to poor risk management. It then outlines approaches to measuring market risk exposure, including dollar value exposure, RiskMetrics, historical simulation, and Monte Carlo simulation. Regulators set capital requirements based on measures of market risk to ensure banks hold sufficient capital to cover potential losses.
Monte Carl Simulation is a powerful and effective tool when used properly helps to navigate the expected Net Present Value NPV. This presentation helps to improve the pattern to ackowlege onthe Odessa Investment by Decision Dres.
!JWI 531 Financial Management II Week Four Lec.docxkatherncarlyle
!
JWI 531
Financial Management II
Week Four | Lecture Two
!
!
Please note that this basic version of the lecture is provided as a convenience for the student, and may be
missing interactive materials throughout. Students are still responsible for reviewing the missing
materials - including audio, video, and interactive widgets - that are found in the full lecture.
- Page
-1
ADDITIONAL VALUATION
TECHNIQUES: SENSITIVITY ANALYSIS
AND DECISION TREES
!
In the digital age, businesses are deluged with data. Sophisticated
tools are abundant. Until recently, however, the financial world’s
wizardry seemed invincible. Recent events have significantly
changed that perception.
But a few complex techniques still remain unblemished. Sensitivity
analysis and decision trees, in particular, can help you manage
uncertainty about the future. And businesses today have learned to
live with a high degree of uncertainty.
The assets companies own will eventually reveal their full,
productive capacity. The key word is eventually. You won’t know just
how valuable an entity or a project is until that time comes.
Since you know you’re going to be wrong at some point, what can
you do about it? Not much, except to minimize the damage and
incorporate uncertainty into your decision-making processes.
- Page
-2
HOW TO BE GOOD AT BEING WRONG
The greatest value of sensitivity analysis is that it quickly shows you
just how wrong your valuation estimate can be and still be OK.
When you’re investing precious resources into a project or a
business, you’ll definitely want to know what will happen should
things turn out worse or better than expected.
Simply stated, sensitivity analysis studies multiple scenarios. You
create a range of excessively negative and positive situations
(including the most likely scenario in between) and adjust a limited
number of key variables like discount and growth rates. You then
compare all these scenarios. The purpose is to reveal how sensitive a
model is to fluctuations in one direction or another. Because
valuation is an imperfect science, financial decision-makers
desperately want to know the margin of error they have if
something goes wrong.
The most basic approach in the sensitivity-analysis tool kit is simple
data entry—substituting different figures into your formulas and
models and seeing what you get. When doing your analysis of
discounted cash flow, net present value, or internal rate of return,
the easiest way to incorporate sensitivity analysis is to make a table
with long-term growth figures as column values and various
discount rates as row values. (You can select other relevant inputs,
- Page
-3
but whichever you choose, make sure you’re focusing on those that
have the most influence over the outcome.) Changing these
variables can show you how a small movement can vastly alter the
expected intrinsic value of an investment.
L ...
Company Valuation webinar series - Tuesday, 4 June 2024FelixPerez547899
This session provided an update as to the latest valuation data in the UK and then delved into a discussion on the upcoming election and the impacts on valuation. We finished, as always with a Q&A
Top mailing list providers in the USA.pptxJeremyPeirce1
Discover the top mailing list providers in the USA, offering targeted lists, segmentation, and analytics to optimize your marketing campaigns and drive engagement.
At Techbox Square, in Singapore, we're not just creative web designers and developers, we're the driving force behind your brand identity. Contact us today.
Navigating the world of forex trading can be challenging, especially for beginners. To help you make an informed decision, we have comprehensively compared the best forex brokers in India for 2024. This article, reviewed by Top Forex Brokers Review, will cover featured award winners, the best forex brokers, featured offers, the best copy trading platforms, the best forex brokers for beginners, the best MetaTrader brokers, and recently updated reviews. We will focus on FP Markets, Black Bull, EightCap, IC Markets, and Octa.
Understanding User Needs and Satisfying ThemAggregage
https://www.productmanagementtoday.com/frs/26903918/understanding-user-needs-and-satisfying-them
We know we want to create products which our customers find to be valuable. Whether we label it as customer-centric or product-led depends on how long we've been doing product management. There are three challenges we face when doing this. The obvious challenge is figuring out what our users need; the non-obvious challenges are in creating a shared understanding of those needs and in sensing if what we're doing is meeting those needs.
In this webinar, we won't focus on the research methods for discovering user-needs. We will focus on synthesis of the needs we discover, communication and alignment tools, and how we operationalize addressing those needs.
Industry expert Scott Sehlhorst will:
• Introduce a taxonomy for user goals with real world examples
• Present the Onion Diagram, a tool for contextualizing task-level goals
• Illustrate how customer journey maps capture activity-level and task-level goals
• Demonstrate the best approach to selection and prioritization of user-goals to address
• Highlight the crucial benchmarks, observable changes, in ensuring fulfillment of customer needs
B2B payments are rapidly changing. Find out the 5 key questions you need to be asking yourself to be sure you are mastering B2B payments today. Learn more at www.BlueSnap.com.
Event Report - SAP Sapphire 2024 Orlando - lots of innovation and old challengesHolger Mueller
Holger Mueller of Constellation Research shares his key takeaways from SAP's Sapphire confernece, held in Orlando, June 3rd till 5th 2024, in the Orange Convention Center.
3 Simple Steps To Buy Verified Payoneer Account In 2024SEOSMMEARTH
Buy Verified Payoneer Account: Quick and Secure Way to Receive Payments
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Skype: SEOSMMEARTH
Telegram: @seosmmearth
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Best practices for project execution and deliveryCLIVE MINCHIN
A select set of project management best practices to keep your project on-track, on-cost and aligned to scope. Many firms have don't have the necessary skills, diligence, methods and oversight of their projects; this leads to slippage, higher costs and longer timeframes. Often firms have a history of projects that simply failed to move the needle. These best practices will help your firm avoid these pitfalls but they require fortitude to apply.
Building Your Employer Brand with Social MediaLuanWise
Presented at The Global HR Summit, 6th June 2024
In this keynote, Luan Wise will provide invaluable insights to elevate your employer brand on social media platforms including LinkedIn, Facebook, Instagram, X (formerly Twitter) and TikTok. You'll learn how compelling content can authentically showcase your company culture, values, and employee experiences to support your talent acquisition and retention objectives. Additionally, you'll understand the power of employee advocacy to amplify reach and engagement – helping to position your organization as an employer of choice in today's competitive talent landscape.