Risk Analysis and the Optimal Capital Budget
Finansų skaidrės. Risk Analysis and the Optimal Capital Budget. Content. Types of Risk. Individual. Types of Risk. Corporate. Types of Risk. Corporate. Important for. Types of Risk. Market. Risk Analysis Techniques. Sensitivity. Risk Analysis Techniques. Scenario. Risk Analysis Techniques. Monte Carlo. Risk Analysis Techniques. SML. Risk Analysis Techniques. BETA. Risk-Adjusted Discount Rate Approach. Rationalism. Questions/Answers. The End ?
Types of Risk Individual Corporate Market Methods to Determine Risks Individual Sensitivity Analysis Scenario Analysis Monte Carlo Simulation Market Beta Discount rate Rationalism Questions / Answers The End .
Undiversified stockholders, owners of small businesses. Investors, as it affects stock prices. Stakeholders care about stability. Well-diversified stockholders.
Market (beta) risk is the project’s contribution to the firm’s total risk. It reflects the perspective of the well-diversified stockholders. Risk is measured by effect of beta on project.
Scenario analysis considers both the sensitivity of the key output variable to changes in a key input variable and the probable distribution of these variables. Base-case scenario with expected values. Worst-case, best-case scenario. With ability to change each variable.
Monte Carlo simulation generates random values of input variables and then the NPVs are computed. Ties together sensitivities and probability distributions of input variables. Generating set of NPVs, mean and standard deviation. The risk is measured by expected profitability and the standard deviation.
Market risk (beta) is based on security market line (SML). The project beta can be used to get a required return on equity; To use in the calculation of WACC that will adjust for differences in projects’ market risk.