Monte carlo simulation model, Financial Management

Assignment Help:

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.


Related Discussions:- Monte carlo simulation model

Commodities exchange, Explain the organization and function of commodities...

Explain the organization and function of commodities exchange

Fiancial management, Ashok is to receive an amount of Rs. 15,00,000 from hi...

Ashok is to receive an amount of Rs. 15,00,000 from his relative after 3 years. He wants to buy a house for which he wants the money to be paid now. His relative had already invest

Define moody or standard & poor credit ratings, Why do most international b...

Why do most international bonds have high Moody’s or Standard & Poor’s credit ratings? Answer:  Moody’s Investors Service and Standard & Poor’s offer credit ratings on several

Define foreign exchange transaction among international bank, How are forei...

How are foreign exchange transactions between international banks settled? Answer:  a network of correspondent banking relationships is known as the interbank market with large c

Caselets, caselets of bajaj electronics

caselets of bajaj electronics

Option-adjusted spread (oas) - total return, The horizon price ...

The horizon price can be determined by incorporating Option-Adjusted Spread (OAS) into a total return analysis. But this requires a valuation mo

Explain the time value of money, What is the time value of money? The m...

What is the time value of money? The meaning of time value of money is that money you hold in your hand today is worth much more than money you suppose to receive in the future

Illustrate methods to manage cash resources, Q. Illustrate Methods to Manag...

Q. Illustrate Methods to Manage cash resources? There are several methods which may be of use in managing resources. The particular tool selected will depend on its reliability

Define relationship between bond''s market price and its ytm, What is the r...

What is the relationship between a bond's market price and its promised yield to maturity?  Explain. A bond's market price relies on its yield to maturity abbreviated as YTM.  Wh

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd