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
Estimating the market value of a share The dividend expansion model suggests a method whereby share values can be estimated from information on the required return on equity an

364-Day T-Bills The Government considered that it is important to develop government securities market for monetary control. It also had an intention to ensure that government'

It is a feature that allows the issuer to redeem its bonds before maturity. Almost all convertible bonds come with this feature. Due to this feature, bonds carry

1.  Discuss the various techniques of cash management for an efficient working capital Management. 2.  Discuss the MM Hypothesis of Capital structure and its importance in corpo

Characteristics of Warrants As mentioned earlier, a warrant is a variant of a call option and gives the holder a certain right to purchase shares of the company at a predetermi

Settlement of the Index Options Contract In the index options contract, the premium to be paid or to be received is calculated for each CM after netting the positions at the en

Best practice or functional benchmarking Compare an internal function to 'the best' however not necessarily an organisation in same industry for example compare administrati

What is trustworthy collateral from the lenders' perspective?Explain whether accounts receivable and inventory are trustworthy collateral. Assets that are readily marketable of

Debit Credit Accounts receivable $300,000 Allowance for doubtful accounts $35,000 Sales for 2010 were $5,500,000. All sales were sales on account. At the end of each month

Identify and explain the key stages in the capital investment decision-making process and the role of investment appraisal in this process.