Monte carlo simulation model, Financial Management

Monte Carlo Simulation Model

Monte Carlo simulation is used to analyse to what extent the valuation of the chosen company is dependent on the assumptions. Monte Carlo simulation is based on artificially creating a chance process, running it many times and observing the result (Barreto & Howland, 2005). A deterministic model is created on the excel sheet for the calculation of valuation of the share of the company. A set of inputs are identified that are assumed to arrive at the valuation of the company. These inputs are varied and result of the model is evaluated. This way the model is run many times. Results are analysed using statistical methods like histograms, probability distribution, and summary statistics. Monte Carlo simulation takes into account already defined variables with their all possible values and iterate these values thousands of time to analyse all the possible results expected with the change in inputs.

359_Monte Carlo Simulation.png

Figure: Monte Carlo Simulation model

So in Monte Carlo simulation instead of fixed inputs a probability distribution is applied to some or all of the inputs which generates a probability distribution of the Output.

Analysis of the result of the Monte Carlo simulation is done to analyse how the valuation of the companies changes with the change in inputs. But this simulation requires that inputs like beta, growth rates are defined by a distribution. Distribution could be normal, triangular, binomial, lognormal, studentt, exponential etc. Triangular distribution is typically used where data is predicted subjectively and it is not possible to collect sufficient data for the population sample. This is based on a minimum, maximum and a subjective guess what is the most likely value the data can take.

Posted Date: 2/21/2013 2:45:30 AM | Location : United States







Related Discussions:- Monte carlo simulation model, Assignment Help, Ask Question on Monte carlo simulation model, Get Answer, Expert's Help, Monte carlo simulation model Discussions

Write discussion on Monte carlo simulation model
Your posts are moderated
Related Questions
agency relationship between shareholders and auditors

Remaining differences with US GAAP IFRS 8 comprise intangible assets as part of the non-current assets. SFAS 131 only refers to tangible assets. IFRS 8 requires method

What is a security? The Securities are claims on financial assets.  They can be explained as "claim checks" that give their owners the right to obtain funds in the future.  Sec

Analysing performance through ratios Ratios are an effective way of analysing financial statements. A ratio is 2 figures compared to each other and can either be in absolute te

sk company had the following balance sheets and income statements over the last 3 years

Illustration  Find out the value of zero-coupon bond when maturity value is Rs.1,00,000, discounting rate is 12%, and the period is 25.  Then,

To calculate the Cost of Capital, we will use the Weighted Average Cost of Capital (WACC) formula             WACC = (E/V) X R E + (D/V) X R D X (1 - T C ) where

(a) The position of an agency that sells a callable coupon bond. We supposed that coupon bond has a maturity of 3 years and is callable only at the second year. (b) The market t

Trade credit is free credit.  Do you agree or disagree with this statement?  Explain. Trade credit isn't free.  It has a value.  Who bears that cost depends on the conditions o

Divestment of company re-organisations Adisinvestment or divestment is selling part of the business or subsidiary to another third party. Reasons and features for divestme