What are the benefits of financial sensitivity analysis and how can we apply for firms long-term...

What are the benefits of financial sensitivity analysis and how can we apply for firms long-term value?

Expert Solution

Answer: Financial sensitivity analysis- This analysis is used in financial analysis to know how an independent variable will have impact on dependent variable under certain circumstances and assumptions. It also tells the outcome by changing one variable and keeping other variables constant.

Benefits of financial sensitivity analysis- Are as following:

It provides in-depth analysis of financials of the company or industry or interest rate and bonds, investment etc.
It is helpful in taking decisions.
It helps in quality check to know which variable is having greater impact on success or failure of a particular project.
It can identify strong n weak areas of business so it helps management to remove or add variables accordingly.

We can apply financial sensitivity analysis in the firms who have good brand value and are expected to generate returns even in the future. We can apply financial sensitivity analysis to check the weaker and stronger segments of firm so that resources can be allocated optimally.

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