MONTE CARLO SIMULATION AND VALUATION: A STOCHASTIC APPROACH

  • Marcos Roberto Gois de Oliveira
  • Luiz Borges de Medeiros Neto
Keywords: Valuation, Monte Carlo Simulation, Discounted Cash Flow, Risk.

Abstract

Among the various business valuation methodologies, the discounted cash flow is still the most adopted nowadays on both academic and professional environment. Although many authors support thatmethodology as the most adequate one for business valuation, its projective feature implies in an uncertaintyissue presents in all financial models based on future expectations, the risk that the projected assumptionsdoes not occur. One of the alternatives to measure the risk inherent to the discounted cash flow valuation isto add Monte Carlo Simulation to the deterministic business valuation model in order to create a stochastic model, which can perform a statistic analysis of risk. The objective of this work was to evaluate thepertinence regarding the Monte Carlo Simulation adoption to measure the uncertainty inherent to the business valuation using discounted cash flow, identifying whether the Monte Carlo simulation enhance theaccuracy of this asset pricing methodology. The results of this work assures the operational e icacy ofdiscounted cash flow business valuation using Monte Carlo Simulation, confirming that the adoption of thatmethodology allows a relevant enhancement of the results in comparison with those obtained by using thedeterministic business valuation model.

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How to Cite
Oliveira, M., & Medeiros Neto, L. (1). MONTE CARLO SIMULATION AND VALUATION: A STOCHASTIC APPROACH. REGE Revista De Gestão, 19(3). https://doi.org/10.5700/issn.2177-8736.rege.2012.49927
Section
Finanças