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Hands-On Financial Modeling with Microsoft Excel 2019 by Shmuel Oluwa

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Understanding scenario analysis

In sensitivity analysis, we selected a few inputs or drivers and changed them, while keeping all other variables the same. This showed us the isolated effect that each of the selected inputs has on share price. However, in practice, this is rarely the case. Variables do not change in isolation. What you generally have is a number of variables changing as a result of a certain set of circumstances, or a scenario. Scenario analysis usually looks at two or three sets of circumstances, most likely, worst-case and best-case scenarios.

For each scenario, you would assume alternative values for selected variables. In selecting the variables, you would concentrate on those inputs or drivers that are the most subjective. ...

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