ValuationSim is a business simulation designed to be used in corporate valuation courses. It simulates a small private equity firm that acquires companies based on their valuations using an assigned budget. Students in teams of two or three individuals perform valuations based on data and assumptions provided at the beginning of each round and then decide what acquisitions to make. The aim in each round is to have the lowest valuation errors and to generate the highest return from the acquired firms. 

The data and the assumptions are few and simple in the first rounds. As the simulation progresses, the data and assumptions increase in quantity and complexity. This process allows the participants to gradually improve their valuation analytical skills using basic techniques at the beginning and more refined techniques at the end.

There are instructions and a tutorial for each round. Once students enter their valuations for each firm and their decisions on which firms to acquire, the administrator of the simulation processes the round and publishes reports with the results. Students are required to use Excel in their valuation and to upload their file to the website showing their work. These files are downloadable.  

After each round, team reports provide information on forecast errors and annual returns for each of the firms acquired. A class report allows students to compare their performance relative to other teams infusing a competitive environment that results in higher motivation to succeed while learn valuation techniques. 

Team valuations are compared to the valuations performed by the simulation using the DCF method. Students are required to use FCFE, FCFF and the comparables methods of valuation in a sequential mode. Learning is reinforced by applying valuation models and techniques for many firms for multiple rounds, The simulation also improves students' skills in financial modeling using Excel. 

The simulation is administered on General feedback is given after each simulation round. A score is assigned based on the accuracy of the valuation and the annual return of the acquired companies including the spread between the acquisition price and its intrinsic valuation after one year. Team scores are assigned after each round. At the end of the simulation, team scores are compared and proportional scores assigned.

Advantages of a Valuation Simulation

The repetitive nature of doing valuations reinforces the learning of the following subjects:
1. How terminal value is calculated: using the next year FCF and not the long term growth rate of sales.
2. The differences between FCFF and FCFE and the information required to build them.
3. When to use cost of equity and WACC as the discount rate.
4. By using many times the words required return, discount rate, cost of capital, cost of equity and WACC, students learn the difference between these concepts.
5. How to calculate WACC.
6. Excel skills are improved.
7. Improve financial modelling skills.
8. Become more conscious about errors in spreadsheet modeling.
9. Observe the impact on valuation accuracy on acquisition decision.
10. Confront the decision to acquire when facing similar valuations, but different risk.

Recommended Decision Schedule

The strategy is to go from the simple (and quick) to the complex. The data provided and the complexity of the analysis and FCF building increases as the simulation progresses. Decisions (and valuations) are made each week. Each week is one round.   
Round One. FCF-Based Valuation. Students perform valuation using information consisting of FCFs, a growth rate of these FCFs during a planning period and after, and a discount rate. 
Round Two. Value Drivers-Based Valuation. Instead of FCFs students preform valuation based on information consisting of profit margins, assets requirements, a discount rate and sales growth. 
Round Three. Accounting-Based Valuation