Application of the Monte Carlo method in evaluation of the Ambtev company with unusual capital cost

Abstract

One of the most commonly used methods to determine a company's value is the discounted cash flow (DCF), a method that consider financial and accounting data to measure its fair value, based on the projection of future cash flow benefits. However, despite being the most used model, this method may not adequately incorporate valuation risks, such as the risk of capital cost, which is imprecise in emerging countries, due to the constant fluctuations of interest rates, inflation and the market itself. One way to incorporate such risks in the model is to use probability distributions with Monte Carlo simulations to determine predictions of various values that a firm can undertake. Regarding to this, the main objective of this work is to verify the accuracy of the use of Monte Carlo simulations in the process of valuation of a company through the discounted cash flow method, including the uncertainty of the cost of capital assumption. After the analysis, it was concluded that the Monte Carlo simulations is a powerful tool to support decision making, because although it does not predict the exact value of the company, it helps understanding the risks and softens the subjectivity of valuation, allowing to know a range of values that a company can assume in different economic scenarios. The value found for the firm in the deterministic model is close to the average of the simulations, as is the cost of capital.