A Valuation Model of The Simulated Firm

Abstract

Valuing the firm in business simulations is of utmost im-portance since it is the traditional way in which total or partial student performance is evaluated in most simula-tions. We propose a valuation model based on the methods used in traditional valuation. The model, which can be em-bedded in the simulation code, forecasts cash flows based on historical data and performs valuation using the Dis-counted Cash Flows method (DCF). The terminal value of the firm is estimated using either DCF or EBITDA multi-ples, depending on the instructor’s choice. Short-term sales growth is estimated on historical growth using regression analysis while long-term growth is based on a growth rate decided by the instructor within a certain range. Cash flows are built using four value drivers: sales growth, prof-it margin, assets requirement, and cost of capital. The for-mer three simplifies the valuation of the firm at the begin-ning of the simulation when no historical data is available. The cost of capital is arbitrarily selected by the instructor according to guidelines summarizing the most important financial theories regarding this variable.