The Monte Carlo simulation combines the two to give us a powerful tool that allows us to obtain a distribution (array) of results for any statistical problem with numerous inputs sampled over and over again Wait, company valuation, ok, but what is a Monte-Carlo simulation?Īccording to Investopedia: The Monte Carlo method is a stochastic (random sampling of inputs) method to solve a statistical problem, and a simulation is a virtual representation of a problem. DCF is just a use-case (actually quite common), but, as a side comment, I re-used this methodology also a lot in my work experience, when it comes to 'stress-test' the revenue simulation for any business case presenting many input parameters. When it comes to ompany valuation, one of the method which comes back is performing a company valuation using Discounted Cash Flows method and a Monte-Carlo simulation to assess its value. A few months ago, I had an interesting conversation regarding the usage of analytics in finance with someone working in a German DAX-listed company which grows through M&As.
