During a recent webinar on the use of Monte Carlo for valuing distressed companies, an audience member asked: “Have the bankruptcy court and other courts accepted the Monte Carlo method?” Yes, the speakers—Jim Alerding (Alerding Consulting) and Matt Bernstein (Dixon Hughes Goodman)—pointed out.

In the Lyondell case (Lyondell Chemical Co. v. Occidental Chemical Corp., 608 F.3d 284, 5th Cir. 2010), which was an environmental cleanup case, the side opposing the use of Monte Carlo actually conceded that the method is reliable. Also, the court said that “just because Monte Carlo simulation produces a range of outcomes … does not mean it is speculative” and “the EPA itself has endorsed the use of Monte Carlo analysis.” In a bankruptcy case (In re Nanovation Technologies, Inc., 2007 Bankr. LEXIS 1862, May 17, 2007), the expert opposing Monte Carlo was not challenging the model but said that he had never seen it used in similar circumstances. But the court said that it is a “generally accepted statistical tool” and there was “no evidence that might provide a reason to believe that [the analysis] is unreliable.” Of course, you can still be challenged on the analysis itself if, for example, the opposition feels you used the wrong inputs or assumptions.

Another audience member asked how one might report on a Monte Carlo simulation in a valuation report. Since the SSVS and USPAP both allow reporting a conclusion of value as either a single amount or a range of values, the report could include a conclusion as a range of values selected from the simulation or a single amount selected from the simulation. Keep in mind that the valuation analyst should be prepared to defend the selection of the range or the amount. It is suggested that supporting language be included within the report itself.

The webinar, Monte Carlo in Distressed Company Situations, is available in BVR’s on-demand training archive.