{"id":101,"date":"2024-03-30T12:22:26","date_gmt":"2024-03-30T12:22:26","guid":{"rendered":"http:\/\/localhost:8080\/wordpress1\/?p=101"},"modified":"2024-04-06T14:20:41","modified_gmt":"2024-04-06T14:20:41","slug":"monte-carlo-simulation-use-case-in-valuation","status":"publish","type":"post","link":"http:\/\/localhost:8080\/wordpress1\/2024\/03\/30\/monte-carlo-simulation-use-case-in-valuation\/","title":{"rendered":"Monte Carlo Simulation Use Case in Valuation"},"content":{"rendered":"\n

Assumtions in DCF Model:<\/strong><\/p>\n\n\n\n

    \n
  1. Risk Free Rate of 91 days Tbill taken as 6%<\/li>\n\n\n\n
  2. Market Risk Premium 6%<\/li>\n\n\n\n
  3. Beta calculated from regression model = 1.2<\/li>\n\n\n\n
  4. Tax Rate = 30%<\/li>\n\n\n\n
  5. Terminal Growth Rate of Industry = 6% <\/li>\n<\/ol>\n\n\n\n

    Problem with the Assumptions:<\/strong><\/p>\n\n\n\n

    Risk free free<\/strong> <\/p>\n\n\n\n

      \n
    1. Subject to change by monteory policy.<\/li>\n\n\n\n
    2. We are not sure about the direction of change but we are certain basis previous montetoy policies that maximum rate change is 25bps.<\/li>\n\n\n\n
    3. Better Assumtpion: If current risk free rate of 91 days T Bill is 7% then new rate will be in range 6.75% to 7.25%<\/li>\n<\/ol>\n\n\n\n

      Market Risk Premium<\/strong><\/p>\n\n\n\n

        \n
      1. Indian Markets are volatile and every industry has different risk premiums<\/li>\n\n\n\n
      2. Statisca US Market Risk Premium publication shows that lower range of 5.3% and higher range of 5,7% prevails in the US<\/li>\n\n\n\n
      3. Using Coefficient of Variation of we can derive India Market risk premium using USA Market risk premium<\/li>\n\n\n\n
      4. Better Assumption: Inida Market Risk Premium = USA Market Risk Premium * Coeff of Variation<\/li>\n<\/ol>\n\n\n\n

        Beta:<\/strong><\/p>\n\n\n\n

          \n
        1. Which granularity of data – Daily\/Weekly\/Monthly stock data with the Index. Every day prices will change which will impact the regression beta<\/li>\n\n\n\n
        2. Better Assumtption: We can take 95% confidence range from regression results rather than using a point estimate for the beta<\/li>\n<\/ol>\n\n\n\n

          Tax Rate:<\/strong><\/p>\n\n\n\n

            \n
          1. Companies Tax structure is complex and we cannot assume a flat rate of 30%<\/li>\n\n\n\n
          2. Better Assumption: Tax Rate lower limit 26% and higher limit 30%<\/li>\n<\/ol>\n\n\n\n

            Terminal Growth Rate<\/strong><\/p>\n\n\n\n

              \n
            1. We can use industry growth rate as guide for terminal growth rate but company specific growth will be different depending on the buisness life cycle<\/li>\n\n\n\n
            2. Better Assumption: Mean Growth Rate 7% with standard deviation of 1% <\/li>\n<\/ol>\n","protected":false},"excerpt":{"rendered":"

              Assumtions in DCF Model: Problem with the Assumptions: Risk free free Market Risk Premium Beta: Tax Rate: Terminal Growth Rate<\/p>\n","protected":false},"author":1,"featured_media":186,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"career":[18],"blocksy_meta":[],"_links":{"self":[{"href":"http:\/\/localhost:8080\/wordpress1\/wp-json\/wp\/v2\/posts\/101"}],"collection":[{"href":"http:\/\/localhost:8080\/wordpress1\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"http:\/\/localhost:8080\/wordpress1\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"http:\/\/localhost:8080\/wordpress1\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"http:\/\/localhost:8080\/wordpress1\/wp-json\/wp\/v2\/comments?post=101"}],"version-history":[{"count":2,"href":"http:\/\/localhost:8080\/wordpress1\/wp-json\/wp\/v2\/posts\/101\/revisions"}],"predecessor-version":[{"id":104,"href":"http:\/\/localhost:8080\/wordpress1\/wp-json\/wp\/v2\/posts\/101\/revisions\/104"}],"wp:featuredmedia":[{"embeddable":true,"href":"http:\/\/localhost:8080\/wordpress1\/wp-json\/wp\/v2\/media\/186"}],"wp:attachment":[{"href":"http:\/\/localhost:8080\/wordpress1\/wp-json\/wp\/v2\/media?parent=101"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"http:\/\/localhost:8080\/wordpress1\/wp-json\/wp\/v2\/categories?post=101"},{"taxonomy":"post_tag","embeddable":true,"href":"http:\/\/localhost:8080\/wordpress1\/wp-json\/wp\/v2\/tags?post=101"},{"taxonomy":"career","embeddable":true,"href":"http:\/\/localhost:8080\/wordpress1\/wp-json\/wp\/v2\/career?post=101"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}