The Monte Carlo simulation is a model that calculates the probabilities of different results in a process where there is much inherent uncertainty. The model makes use of randomly generated numbers to obtain thousands of possible results, from which a most likely outcome can be deduced. We will look at growth in free cash flow, FCFF, as well as the cost of capital, WACC, which are both integral parts of our DCF model.
Calculate the FCFF growth rates for the historical years Y02A to Y05A using the following formula:
The following screenshot shows the calculated historical growth in FCFF:
Usually, Monte Carlo simulation uses thousands of repetitions. However, for illustration purposes, we will limit the number to 100. Let's take the average of FCFF historical growth.
The following screenshot shows the calculation of mean growth...