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

What is suspension of payments, Is it possible for a company with a positiv...

Is it possible for a company with a positive net income and which does not distribute dividends to find itself in suspension of payments?  Yes. A lot of companies which entered

Objective of working capital management, What is the Objectives of Working ...

What is the Objectives of Working Capital Management? Describe please.

Describe the term- investment decision, Describe the term- Investment Decis...

Describe the term- Investment Decision Investment decision, also referred to as the capitalbudgeting decision, simply means decisions to acquire assets or to invest in aproj

Operational rules for financial management, Operational Rules for Financial...

Operational Rules for Financial Management Besides features, certain operational rules are established as to the subsequent: 1) While revenue and expenses are reported;

What are the motives of holding cash, Q. What are the Motives of Holding Ca...

Q. What are the Motives of Holding Cash? Motives of Holding Cash: - In every business assets are kept for the reason that they generate profit. But cash is an asset which doesn

Example on modigliani and miller approach, Q. Example On modigliani and mil...

Q. Example On modigliani and miller approach? The subsequent is the data regarding two companies X and Y belonging to the same risk class: Company X

Define the advantages of collecting early, What are the advantages of “coll...

What are the advantages of “collecting early” and how do companies attempt to do this? Money has time value.  The sooner cash is collected, the better.  Companies employ regional

Return risk and security market line /net present value .., return risk and...

return risk and security market line /net present value and investment critirea actually iwill be tested in 6 question culculation and 1 question theory about risks

Describe the money market products, Question 1 Under a hire purchase de...

Question 1 Under a hire purchase deal structured by X Finance Ltd. for Y Corporation, the finance company has offered to finance the purchase of equipment that costs Rs. 200 la

Help ASAP, If firm A has a higher debt-to-equity ratio than firm B then tha...

If firm A has a higher debt-to-equity ratio than firm B then that means what

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