Sensitivity Analysis

Sensitivity analysis (SA) is the study of how the uncertainty in the output of a model (numerical or otherwise) can be apportioned to different sources of uncertainty in the model input.[1] A related practice is uncertainty analysis which focuses rather on quantifying uncertainty in model output. Ideally, uncertainty and sensitivity analysis should be run in tandem.

In more general terms uncertainty and sensitivity analysis investigate the robustness of a study when the study includes some form of statistical modeling. Sensitivity analysis can be useful to computer modelers for a range of purposes,[2] including:

Support decision making or the development of recommendations for decision makers (e.g. testing the robustness of a result); Enhancing communication from modellers to decision makers (e.g. by making recommendations more credible, understandable, compelling or persuasive); Increased understanding or quantification of the system (e.g. understanding relationships between input and output variables); and Model development (e.g. searching for errors in the model).

Let us give an example: in any budgeting process there are always variables that are uncertain. Future tax rates, interest rates, inflation rates, headcount, operating expenses and other variables may not be known with great precision. Sensitivity analysis answers the question, "if these variables deviate from expectations, what will the effect be (on the business, model, system, or whatever is being analyzed)?"

Monte Carlo Simulation 273

Risk analysis is part of every decision we make. We are constantly faced with uncertainty, ambiguity, and variability. And even though we have unprecedented access to information, we cant accurately

predict the future. Monte Carlo simulation (also known as the Monte Carlo Method) lets you see all the possible outcomes of your decisions and assess the impact of risk, allowing for better decision making under uncertainty.

What is Monte Carlo simulation? Monte Carlo simulation is a computerized mathematical technique that allows people to account for risk in quantitative analysis and decision making. The technique is used by professionals in such widely disparate fields as finance, project management, energy, manufacturing, engineering, research and development, insurance, oil & gas, transportation, and the environment.

Monte Carlo simulation furnishes the decision-maker with a range of possible outcomes and the probabilities they will occur for any choice of action.. It shows the extreme possibilitiesthe outcomes of going for broke and for the most conservative decisionalong with all possible consequences for middle-of-the-road decisions.

The technique was first used by scientists working on the atom bomb; it was named for Monte Carlo, the Monaco resort town renowned for its casinos. Since its introduction in World War II, Monte Carlo simulation has been used to model a variety of physical and conceptual systems.

A problem solving technique used to approximate the probability of certain outcomes by running multiple trial runs, called simulations, using random variables.

Read more: http://www.investopedia.com/terms/m/montecarlosimulation.asp#ixzz1xELzumy9

Capital Budgets and Project Authorizations Capital budgeting (or investment appraisal) is the planning process used to determine whether an organization's long term investments such as new machinery, replacement machinery, new plants, new products, and research development projects are worth pursuing. It is budget for major capital, or investment, expenditures.[1]

Many formal methods are used in capital budgeting, including the techniques such as

Accounting rate of return Payback period Net present value Profitability index Internal rate of return Modified internal rate of return Equivalent annuity

These methods use the incremental cash flows from each potential investment, or project. Techniques based on accounting earnings and accounting rules are sometimes used - though economists consider this to be improper - such as the accounting rate of return, and "return on investment." Simplified and hybrid methods are used as well, such as payback period and discounted payback period.

What is An Efficient Market

When people talk about market efficiency they are referring to the degree to which the aggregate decisions of all the market's participants accurately reflect the value of public companies and their common shares at any moment in time. This requires determining a company's intrinsic value and constantly updating those valuations as new information becomes known. The faster and more accurate the market is able to price securities, the more efficient it is said to be.

This principle is called the efficient market hypothesis, which asserts that the market is able to correctly price securities in a timely manner based on the latest information available and therefore there are no undervalued stocks to be had

since every stock is always trading at a price equal to their intrinsic value. However, the theory has its detractors who believe the market overreacts to economic changes, resulting in stocks becoming overpriced or underpriced, and they have their own historical data to back it up.

Venture Capital
Money provided by investors to startup firms and small businesses with perceived long-term growth potential. This is a very important source of funding for startups that do not have access to capital markets. It typically entails high risk for the investor, but it has the potential for above-average returns.

Investopedia explains 'Venture Capital' Venture capital can also include managerial and technical expertise. Most venture capital comes from a group of wealthy investors, investment banks and other financial institutions that pool such investments or partnerships. This form of raising capital is popular among new companies or ventures with limited operating history, which cannot raise funds by issuing debt. The downside for entrepreneurs is that venture capitalists usually get a say in company decisions, in addition to a portion of the equity.

Read more: http://www.investopedia.com/terms/v/venturecapital.asp#ixzz1xEOvjMCB

The Initial Public Offering

General Cash Offers By Public Companies 425 general cash offer Definition Public offering of a security issue to every interested investor, with or without involving an underwriter. In contrast, a rights issue is offered only to the current stockholders. In the U.S., general cash offer is the most common method of selling debt (bond) and equity (stock) issues. According to the SEC Rule 415 (1982), a large firm can file a single new issue registration statement that is valid for two years. Within this period the firm can make general cash offers as and when it wants.

The Role of The Underwriters