To discuss: The way in which Person X (financial analyst) use the scenario analysis to assess the risk for entering into a joint venture in Country A with YF Company.
Introduction:
Scenario analysis is a process of analyzing the possible future events. This analysis helps to determine the effect of what-if questions towards the
Explanation of Solution
The way wherein Person X uses the scenario analysis to assess the risk for entering into a joint venture in Country A with YF Company is as follows:
A 50 percent decrease in share price indicates that the market discounted cash flows at a higher price of the YP Company. As per the reporter views, the C Company has to take into account the risk associated with the gas and oil exploration and even the political risks for undertaking business in the Country A. The Person X has made a scenario analysis by assuming the worst possible consequences related to both risks. This analysis will help the management of the company to recognize the worst probable outcomes. As a result, the management of the company can take suitable steps to reduce the probability of the worst outcomes.
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