Question

1. The Efficient Market Hypothesis (EMH) states that security prices reflected all available information. Explain briefly the definition and benefits of Efficient Market Hypothesis
2. Cash flow statement is an important information for company in making decision. State and explain some usefulness of cash flows minimum 6 items.
3. Credit analysis is more than just establishing the credit worthiness of a company, but the ability to pay its debts at the schedule times. That’s why the commercial lenders (creditors) may need to be rethought and be conducted some steps in credit analysis. Mention and explain concise the series of steps that is used by the creditors!
4. A sensitivity analysis determines how different values of an independent variable affect a certain dependent variable under a given set of assumptions. Explain some of usefulness of the sensitivity analysis!
5. Explain the difference and similarity of merger and acquisition. (minimum 2 items each)

Answer 1

The Efficient Market Hypothesis(EMH) or as alternatively known as Efficient Market Theory(EMT) essentially states that the stocks or shares in the financial or stock markets are commercially exchanged at their actual and fair prices and the financial investors and investors are largely unable to earn excessive profit by purchasing the stocks or shares at prices lower than their market value or price and selling them for higher than their existing or prevailing market values/prices. Under the EMH, it is assumed that the market prices of all the shares or stocks are determined under perfect and complete market information available to all the concerned market entities or agents. One of the most important benefits of the EMH is that it facilitates the establishment and prevalence of fair and equitable stock or share prices in the stock or financial markets thereby preventing any undesirable or unfair trading or commercial exchange of these financial assets or products. It can also ensure long-term and sustainable stability in the stock prices forestalling high levels of market volatility and risk and providing assurance to the financial investors and speculators. Furthermore, effective implementation of EMH in the market can also lead to market equity and fairness among competing financial traders as equal access to all the market information would ensure equality of market power among the traders and no individual trader would have the incentive to engage in any anti-competitive or inequitable stock/share trading and/or speculations.

In Financial Economics and Accounting, a cash flow statement or report basically shows or manifests the overall spending or expenditure level of any business organization or company that has been conducted through cash within a certain time period along with detailed information on how the cash has been spend or expended. Cash flow essentially provides an idea or estimate of the current cash solvency or the position of the cash in any business organization or company. The company or organizational management can assess the current cash position of the company and determine the sufficiency of the available cash for future operational purposes. A cash flow statement or report is therefore extremely important to the concerned stakeholders in business such as shareholders, banks, investors, financial lenders such as banks and other financial institutions, creditors, etc. as it also provides some indications of the economic or commercial profitability or performance of any company or organization in terms of its present cash flow and solvency. A cash flow statement or report can also enable any company management to clearly understand the net or total cash flow and whether the company or organization has a positive or negative cash flow. Positive cash flow would facilitate the liquidation and funding of any future business projects or investments and negative cash flow is an alarm to the organization that it has to control or reduce its cash expenditure or somehow increase cash inflow. A cash flow report is also useful in properly and favorably manipulating the internal financial transactions and operations of any organization or company and formulate necessary financial planning for the future. Furthermore, cash flow of any company or organization also enables the management to prioritize operational plans and decisions which majorly involve cash transactions based on their respective impact on the overall or net cash flow which would affect the future cash solvency or position of the company or organization.

In Finance the credit analysis is used to analyze the creditworthiness of any financial borrower and the cash solvency or position of any individual or a business organization to repay the debt that is accumulated on the overall financial borrowing or loan. As part of the credit analysis, a professional creditor initially obtains the necessary financial information pertaining to the credit history of the financial borrower which commonly includes the records of payments and EMIs on any previous financial loan taken by the individual borrower or the business organization, the overall reputation of the individual or organization, financial liquidity or solvency of the concerned borrower, previous transactional records of the borrower with banks and other financial institutions, and so forth. Secondly, the creditor or the financial lender conducts a thorough analysis or evaluation of the financial information and records of the borrowed that are initially collected. At the organizational level, some of the financial reports and documents analyzed by the creditor or lender include balance sheet, income statement, cash flow statement, and so on to determine the creditworthiness of the financial borrower. Based on a profound examination or scrutiny of the financial records and documents of the borrower, the lender or creditor decides whether to grant financial loan to the borrower or not. In this context, the relevant documents and reports analyzed by the creditor essentially portray indications about the economic performance and financial solvency of the borrowing entity.

In general, the merger refers to the commercial consolidation of two business entities or enterprises to create a new business organization under completely new ownership and management. The formation of a merger generally involves surrendering of the stocks of the respective companies or organizations involved in the merger and the new market stock of the newly formed company or enterprise is generated under the registered official name of the newly formed company. On the other hand, the acquisition is the economic process through which any small or fairly medium scale company or enterprise is commercially acquired by another big or large scale multinational or corporation. Under the acquisition, the large company or corporation usually purchases the assets or takes over the existing assets and management of the acquired company implying that the ownership of the company assets is transferred to the bigger organization and the managerial and operational decisions following the acquisition are also undertaken by the management of the bigger organization or entity.

A sensitivity analysis basically explains how the variations in the dependent variables are impelled or influenced by the variations in the respective independent variables or inputs. Therefore, sensitivity analysis is primarily useful or crucial in examining any statistical or practical association with the concerned dependent variable and the corresponding independent variables thereby, providing a better explanation of any relation between dependent and independent variables. Additionally, it is also useful in conducting statistical forecasting or constructing predictive models hinting towards future trends and variations in the relationship between the dependent and independent variable/s. From an organizational perspective, sensitivity analysis can also be used as one of the major decision-making tools as it can enable the business organizations or companies to evaluate the likelihood or viability of any organizational or operational decisions or strategies based on the possible inputs or the factors/attributes that can potentially effectually determine the success or failure of those strategies or planning.

  References

https://corporatefinanceinstitute.com/resources/knowledge/modeling/scenario-analysis-vs-sensitivity-analysis/#:~:text=Advantages%20of%20Sensitivity%20Analysis&text=Sensitivity%20analysis%20requires%20that%20every,it%20facilitates%20more%20accurate%20forecasting.

https://www.investopedia.com/ask/answers/021815/what-difference-between-merger-and-acquisition.asp#:~:text=A%20merger%20occurs%20when%20two,attempt%20to%20create%20shareholder%20value.

https://corporatefinanceinstitute.com/resources/knowledge/credit/credit-analysis-process/