Corporate Finance Case Study
According to the CAPM, systematic risk is the only relevant risk for capital budgeting purposes; however, the reality which complicates this somewhat. In many instances, a firm will have changeless shareholders; and for them, the relevant measure of risk is the project’s contribution to firm risk. The possibility of bankruptcy also does affect our view of what the measure of risk is appropriate because of the project’s contribution to the firm risk which can affect the possibility of …show more content…
The decision maker then bases his decision on the full range of possible outcomes. The sensitivity analysis which involves determining how the distribution of possible net present values or internal rates of return for a particular project is affected by a change in one particular input variable and this is done by changing the value of one input variable while holding all other input variables constant. Based on the numbers, the project should be accepted because of the required rate of return.
An analyst could make a financial model which will determine the value of a company’s equity of the dependent variable with the given amount of earnings per share as an independent variable. As the company reports at the end of the year, the company’s price to earnings multiple which is another independent variable at that time. The analyst can create the table of predicted price to earnings of multiples and of a corresponding value of the company’s equity based on the different values for each of the independent