Extending the DCF Valuation Model with Monte Carlo Simulations

Abstract

The DCF is a common valuation tool that estimates the intrinsic value of companies based on future cash flows, discounted for the time value of money and risk. However, its deterministic application relies on single-point estimates. The DCF is based on numerous forecast assumptions and constant parameters across all projected years. Consequently, this approach may be deemed somewhat unrealistic and limited in its scope. This limitation is addressed by integrating MCS, which allows for generating multiple scenarios and probability distributions of potential outcomes.