FINE 434 Lecture Notes - Lecture 9: Real Options Valuation, Scenario Analysis, Co-Insurance
Document Summary
1+(cid:4666)1 (cid:3047)(cid:4667)(cid:3253)(cid:3277)(cid:3280)(cid:3281)(cid:3280) (cid:3254)(cid:3277)(cid:3280)(cid:3281)(cid:3280: unlever the beta: (cid:2010)(cid:3048)(cid:3041)(cid:3039)(cid:3032)(cid:3049)(cid:3032)(cid:3045)(cid:3032)(cid:3031), relever the beta: (cid:2010)(cid:3039)(cid:3032)(cid:3049)(cid:3032)(cid:3045)(cid:3032)(cid:3031)=(cid:2010)(cid:3048)(cid:3041)(cid:3039)(cid:3032)(cid:3049)(cid:3032)(cid:3045)(cid:3032)(cid:3031)[(cid:883)+(cid:4666)(cid:883) (cid:1872)(cid:4667)(cid:3005)(cid:3276)(cid:3281)(cid:3280) (cid:3006)(cid:3276)(cid:3281)(cid:3280)] Allows to disentangle effects of financing on firm value. Should yield same result as fcf method. Investors want cash and no accounting stuff: cash now is worth more than cash tomorrow, risk-free cash is worth more than risky cash. Risk of (cid:862)a(cid:374)al(cid:455)sis pa(cid:396)al(cid:455)sis(cid:863): venture capital/private equity approach. Stripped-down version of dcf methods: no interim cash flows. Discount rates may appear arbitrary and too high. Takes into account the real options embedded in firm value. Analysts should exercise the estimators to define a reasonable range of value and to identify key value drivers or assumptions. If done right, valuation yields a large number of value estimates. These estimates need to be boiled down to a range of value that forms the basis of a negotiation strategy, by means of triangulation. Eliminate estimates in which you have little confidence.
