Simulation analysis is useful where decision makers need information about the probabilities of different outcomes.
Not just rolling the dice
If we increase leverage to 50%, what is the probability of financial distress over the next five years? What is the probability that the interest coverage ratio will fall below a certain threshold, or that a particular level of cash flow will be available for distribution to shareholders. Knowing the answers to these questions in a probabilistic framework is extremely useful to senior decision-makers.
Our approach to answering these questions is to combine a powerful simulation engine with the latest applied academic research on topics such as credit ratings, financial distress and interest rates. Unlike others, our approach specifically models the uncertainty around key value drivers.
We use this approach to guide clients on quantifying outcomes in terms of probabilities and optimal capital structure.