“Delusory Numbers- Sharpen Your Analytical Skills”

Hi Friends! We at WWW.assignmentconsulatncy strives to help student in all aspects

of finance assignments & online homework help.  Today, We want to digress a bit from

my actual topic of Valuations and will tell something about qualitative aspects that

help u greatly in evaluating a company prospects. In valuations, what we do is that

most of the time we put  efforts in collecting historical data, assumptions and other

details to carry out our analysis, but we forget the underlying risks that the company

might face because of those assumptions. These risks greatly affect the company’s

decisions about the selection of a particular project.

Suppose there is a company which wants to decide whether to go for a project or not

that gives very good return but carry a great risk. What will be your answer? Confuse.

The answer to this question is actually subjective because the fate of this project lies

on the designation of the person who will take that decision. Suppose the decision

making lies in the hand of an investor, the best decision for him will be to go with the

project as his association with the company is very limited i.e. equal to the amount of

money that he invests in that company .So, he wants to maximize his return. Now,

think from an CEO/CFO perspectives, he may not want to go with this project as it

carries huge risks and might put his careers in trouble. What’s if the decision to select

the project lies in the hand of the Board of directors, they will definitely select the

projects which will not affect the health of the company in the long run. So, they will

analyze its effect from all angles and will take the decision accordingly.

Do you have any idea why I gave the above example? Because I want to show that the

risk taking capabilities varies from person to person.in the above situations one can

easily see that for investors it is highest whereas for CEO/CFO it is lowest. Now, let’s

understand the above concept with different angle. Suppose a company want to invest

in a project costing Rs 10 million and will increase the value of the company by Rs 50

million in one year, but its chance of success is 60 %. Now, as a decision maker how

can you evaluate the above scenario? The given table shows the different scenarios.Factors Success Failure Expected (60%)Cost -10 -10 -10Return 50 0 30Net return 40 -10 20

Now, the answer to this question is simple since the expected return is 20 million and

the rate of return on project is very high i.e. 200 %, it would be better that we will go

with the projects. But in real world, the scenario is totally different because there is

nothing like by chance, expected or probability because there lies only two scenarios

i.e. upside or downside. If it will be upside it is ok but what will happen if it is

downside? Again, it depends on many factors. Suppose the total value of the firm is 8

million before the project and you used debt to finance this project. Now, what will be

your answer?

No, because if it fails, your company will be in red. What if the size of your company is

1000 million, have cash reserves of 100 million and yearly cash flow of 50 million.

Simply, yes. But in reality it is not like that because many companies give importance

to current income or quarterly income than any future gain. So, in case of loss it will

affect their income. Similarly some CEO /CFO do not go with such projects because it

might affect their reputation in case of failure as risk is high. Hence, in real world

decisions depend on many factors apart from delusory numbers.

Hope you like the analysis given by me. Be ready to explore the world FCFF i.e. the

world of assumptions and complex calculations in my next post.

If you want to get customized help regarding valuation assignment help from our

experts, Please contact us @ www.assignmentconsultancy.com or mail us to

support@assignmentconsultancy.com

We also provide helps related to

Business Finance Assignment Help, Personal Finance Assignment Help, International Finance

Assignment Help, Corporate Finance Assignment Help

All you need to do is to visit our website and log in your account, convey your assignment requirements

to our finance assignment help customer executives. Your job is done. It is as easy as this. So hurry now

and order your finance assignment help or any other assignments help at

www.assignmentconsultancy.com or mail us at support@assignmentconsultancy.com.