4.Reportingtheoutput.Thevalueofabusinessorassetwill
varyacrossscenariosandtherearetwochoiceswhenitcomes
topresentingtheoutputfromscenarioanalysis.Thefirstisto
computeanexpectedvalueacrossscenarios,estimatedusing
theprobabilitiesofscenariosoccurring.Theotheristoreport
a rangeof valuesfor anasset orbusiness,withthelowest
value(orthehighestvalue)acrossallscenariosrepresenting
the bottom (or the top) of the range.
Scenarioanalysisallowsustoseehowthevalueofabusiness
isaffectedby changesin theunderlyingfundamentals,but
thereisa dangerinpresentingvaluations ina rangerather
thanasanestimate.Ifthescenarioscoverthespectrum,asis
thecasewhenwedobest-caseandworst-casescenarios,the
resulting range of values will be so wide that it will be
useless. After all, knowing that a stock could be worth
anywherefrom$15to$70isnotofmuchuseindetermining
whethertobuyitorsellitatamarketpriceof$40.Takingan
expectedvalueacrossscenariosmaybemoreuseful,butthat
expectedvalueshouldbeclose(ifnotidentical)tothesingle
best estimate of value obtained using expected cash flows.
Simulations
Unlikescenarioanalysis,wherewelookatthevaluesunder
discrete scenarios,simulationsallowfor moreflexibilityin
how we deal with uncertainty. In its classic form,
distributionsofvaluesareestimatedforeachparameterinthe
valuation(growth,marketshare,operatingmargin,beta,etc.).
In each simulation, we draw one outcome from each
distributiontogenerateauniquesetofcashflowsandvalue.
Across a large number of simulations, we can derive a
distributionforthevalueofabusinessoranassetthatwill