Advantages and disadvantages of factor models in finance
Financial modeling is used in many corporations in daily operations since it is vital in strategic decision-making. For instance, if a company wants to take over another company, it must make a financial model first. The following are the pros and cons of financial modeling.
Advantages
- Financial modeling deepens the understanding of the business in many divergent ways for decision faster decision making.
- Financial modeling helps in making the correct financial evaluation in the business since it gives a general overview of the performance of the organization.
- Financial modeling is critical in making a decision on the best type of funding that the organization can employ.
Disadvantages
- Financial modeling is time-consuming since it requires a different task before creation.
- Financial modeling does not feature in the soft factor of the acquired companies; the process takes synergies and usually done by reducing expenses.
- Financial modeling is inaccurate since it cannot predict factors such as market share, tax rates, and interest rate of the organization.