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

Total cost of operating the business, Joe's ice cream stroe has to decide w...

Joe's ice cream stroe has to decide whether to shut down this winter or stay open. His projected revenue is $1,200 per week. He has fixed costs (Mortgage, taxes, insurance, etc.) t

Money and Banking, Using a spreadsheet program or a calculator, solve Tracy...

Using a spreadsheet program or a calculator, solve Tracy’s problem of how often to go to the ATM when the nominal interest rate on her bank account is 10 percent, she spends $30 ea

Defien the term ension funds, Pension funds Pension funds offers retire...

Pension funds Pension funds offers retirement income in the form of annuities to employees covered by a pension plan. They obtain contributions from employers or employees and

How does continuous compounding benefit an investor, How does continuous co...

How does continuous compounding benefit an investor? The effect of enhancing the number of compounding periods per year is to increase the future value of the investment.  The

How to develop career strategy, Q. How to develop career strategy? in t...

Q. How to develop career strategy? in this step employees need to focus on developing the knowledge experience and skills necessary to market self to prospective organizations.

Defects in the companys system, The case of McKesson & Robbins scandal (193...

The case of McKesson & Robbins scandal (1938) was happen due to internal fraud. This case is also happen by the faulty work of board of directors. The organization of McKesson & Ro

Define required cash and surplus cash, 1. What is a venture's present value...

1. What is a venture's present value? Does the past matter? What is meant by the statement, "If you are not using estimates, you are not doing a valuation?" 2. Define (a) requ

Identify the parties by name that have an obligation, Identify the parties ...

Identify the parties by name that have an obligation: a. Buyer/Alpha hears a rumor that the toys have not been manufactured according to the expected specifications for such t

Beta, Beta Beta is a measure of the market risk, or methodical risk, o...

Beta Beta is a measure of the market risk, or methodical risk, of a particular privacy or portfolio. Systematic risk defines any risk that influences the value of a huge numbe

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