Damodaran on Valuation Security Analysis Investment

Question: Discuss about the Damodaran on Valuation for Security Analysis Investment. Answer: Introduction This report provides information related to the capital budgeting techniques used by the organization to derive financial information. It includes tool like Net Present value, Tree analysis, internal rate of return, profitability of index, accounting rate of return, average rate of return etc. Capital budgeting tools help in determining the organizations long term investments like purchase of a new plant, research and development projects etc are worth funding through adopting an appropriate capital structure. The major motive of capital budgeting technique is to increase value for the shareholders on a long run. This report determines the sensitivity and scenario analysis of a company while making corporate decision. This technique doesnt provide any such guarantee regarding the investments but provides an expected value through different models to describe future portfolios. The financial manager in an organization has to use his acumen skills to determine portfolio structure. The decision related to the future portfolio need to be in consistency with organizational goals (Ferran and Ho. 2014). Corporate Decision making Corporate decision making are set of instructions given in order to achieve organizational objective. This is one of the most important decisions to work consistently in order to achieve targets. Corporate decision making is important for the goodwill of the organization to attain objectives by implementing the most appropriate plan. Corporate decision making is an efficient way to decide the future of an organization while considering all the variable factors associates with it (McKinsey company. 2009).Both Sensitivity and scenario analysis helps in making financial decision making in order to achieve sustainable result. Sensitivity analysis This model helps in analyzing the variation in the input of a particular model with the change in the situation. The sensitivity analysis is used to measure both quantitative and qualitative terms. The model helps analyzing the variation in the input arising due to uncertainity. This helps in ensuring the quality and reliability of the project. The sensitivity model is also used to know similarities in between the applied model and the process, for analyzing the variation in the factor input and interaction in between the factors. It helps in analyzing the risk associated with a project, financial implementation of the factor inputs affecting the project. This analysis is easy to utilize and to communicate among the stakeholders (Ehrhardt and Brigham.2016). Moreover this analytical tool helps in undertaking better decision in order to achieve breakeven point and cash flow analysis. Capital budgeting in sensitivity analysis gives a clear view about the project. Sensitive analysis chan ges one assumption to other in order to understand the effect on outcome. It helps in giving an estimate about the effect of project in case assumptions are unreliable. Sensitive analysis is highly used in Capital budgeting and provide information about the risk analysis, break even analysis and cash flow. Moreover it has become important for an organization to analyze variable costing associated with it. A small change can affect the NPV which will affect long term budgeting decision (Damodaran.2016). Scenario analysis This analytical tool is used to understand the change in possible outcomes with respect to other alternate. Scenario analysis helps in estimating the expected value of the portfolio after a particular time period considering specific changes in the value of the portfolio. It is used to make estimation to a portfolio value in response of an unfavorable event. The analytical tool involves computing down different type of reinvestment. Scenario analysis provides with a process to make an estimate shift in the value of a portfolio which depend upon the occurrence of the situation. Moreover the technique is used to examine the amount of risk related to a given investment(Wilson.2016). The investor can understand whether the level of risk falls within the comfort zone. The NPV analysis is used in capital budgeting to estimate level of risk associated with it. There are two types of case scenario: best case scenario and worst case scenario. Best case scenario is one that meets out the expec tations whereas worst case scenario is one that does not meet the expectation. This whole process is not reliable as in case of best case scenario in order to meet the cash flow revenue needs to be generated and cost need to be reduced. This whole process will increase the sale (Gatti.2013) While in case of worst case scenario the overall cash flow is less due to the risk associated with the project. Scenario analysis includes multiple scenarios while assuming in between economic and variable assets. This analysis is highly recommended to measure both qualitative and quantitative result (Cornelissen. 2014). Sensitivity analysis vs. Scenario Analysis Sensitivity analysis I s created in order to understand the impact of the variable range on the given outcome. It is based on the variables that impacting valuation used to depict financial models. It isolates the variables and records the range of possible outcomes. Scenario analysis on the other hand is based on different scenario where an analyst determines a particular scenario like a market crash or change in regulatory framework. The analyst changes the scenario as per the situation and aligns the model accordingly. This particular model is comprehensive and provides extreme result after understanding the situation (Berk, DeMarzo, Harford, Ford, Mollica and Finch.2013). Conclusion Corporate decision making includes various techniques that help in achieving sustainable growth. The report lays down the techniques to ascertain sensitivity analysis and scenario analysis in corporate decision making. Risk and return analysis should be viewed while considering the future returns. Capital budgeting effectively uses more than one technique as per the situation in order to ascertain the result. Sensitivity analysis analyzes the variation in the input of a particular model with the change in the situation whereas scenario analysis is used to understand the change in possible outcomes with respect to other alternate. The implication of both the tools varies from situation to situation like current market situation etc. These tools consider the variable factors while considering the overall output. The report provides a brief difference in between two techniques while considering desired result. References Berk, J., DeMarzo, P., Harford, J., Ford, G., Mollica, V. and Finch, N., 2013.Fundamentals of corporate finance. Pearson Higher Education AU. Cornelissen, J., 2014.Corporate communication: A guide to theory and practice. Sage. Damodaran, A., 2016.Damodaran on valuation: security analysis for investment and corporate finance(Vol. 324). John Wiley Sons. Ehrhardt, M.C. and Brigham, E.F., 2016.Corporate finance: A focused approach. Cengage learning. Ferran, E. and Ho, L.C., 2014.Principles of corporate finance law. Oxford University Press. Gatti, S., 2013.Project finance in theory and practice: designing, structuring, and financing private and public projects. Academic Press. McKinsey company. 2009.How companies make good decisions: McKinsey global survey results.Available at https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/how-companies-make-good-decisions-mckinsey-global-survey-results Accessed on 22 January 2017 Wilson, N., 2016.ESOPs: their role in corporate finance and performance. Springer.