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I am looking to model the cash flows associated with a company as part of a Project finance experiment, where I got the idea from here. I'm looking to project cash flows for an Automotive company in India upto 2018, given that I have its set of cash flows upto 2014. I was just wondering how I could look to set this up, in terms of the actual model, as I wasn't able to find any relevant documentation.

Also, would the random variables be something like these, where I'll have to assume some sort of distributions based on historical data: 1) Oil prices 2) Price of plastic/steel 3) Average disposable income of people

Thank You

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Usually in corporate finance you don't value a firm using monte carlo. You define 4-5 scenarios such as: Base Case, Optimistic Case, Conservative Case, Stress Test, and model them accordingly. E.g. In your stress test you would have price plastic/steel soaring, average disposable income going down, etc. Then you test how much debt the firm can handle and how to optimize its capital structure.

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  • $\begingroup$ Thank you. I was just wondering why people don't consider using Monte Carlo Analysis? I realize the relationship between price of plastic and cash flows may not be easily discernible, but can't I run Monte Carlo Simulations to determine the prices of the cars and as a result model cash flows? It seems like it has been done $\endgroup$ – Jojo Sep 1 '15 at 17:28
  • $\begingroup$ The reason why they do it is because they have derivatives they want to value/hedge. All the remaining valuation is done using the method I described above. Unless you have derivatives to price/hedge there is no need to make Monte Carlo simulations. $\endgroup$ – phdstudent Sep 1 '15 at 18:22
  • $\begingroup$ The reason they do it is that most corp finance depts don't have the knowledge/tools to simulate their business plans. EVERY company could use the more complete picture of risk that a forward sim of their important variables would bring. $\endgroup$ – Marc Dec 25 '15 at 5:10

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