Monte Carlo Simulation in the Valuation of High Risk Businesses

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American Society of Appraisers Business Valuation Review™
Winter 2002 Volume 21, Issue 4 pp. 186-189
Benjamin C. Alamar, PhD

Summary

The valuation of high risk businesses poses particular problems for the use of discounted cash flow models. Differing levels of risk within costs and sales, as well as the risk of failure are not necessarily accurately reflected in static assumptions regarding growth rates. This article introduces Monte Carlo simulation techniques into the DCF model and provides an example that illustrates how, with the use of these tools, these high risk businesses may be more accurately valued.
Monte Carlo Simulation in the Valuation of High Risk Businesses
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