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Valuing Equity as an Option
  • Valuing Equity as an Option
  • Valuing Equity as an Option
Originally published: 07/07/2016 08:51
Last version published: 25/10/2016 10:18
Publication number: ELQ-37853-2
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Valuing Equity as an Option

An option pricing program to value the equity in a firm

Prof. Aswath Damodaranby Prof. Aswath Damodaran
Professor at NYU Stern School of BusinessFollow 1,091
NYU Stern School of Businesswith NYU Stern School of Business
An Education in PossibleFollow 62
13 reviews893 views|Start the discussion!|Bookmark download for free
financevaluationpricingequityoption
Description
This program calculates the value of equity as a call option on the value of the underlying firm.

The user has to input the following variables
1. Current value of the underlying firm (or its assets).
2. Variance in the ln(value) of the underlying firm.
3. Face Value of the outstanding debt.
4. Riskless interest rate that corresponds to average duration of debt.
5. Face-value weighted duration of the debt outstanding of the firm.
6. Expected dividend yield on the stock of the firm.

Note: this model is being shared with the authorization of Professor Aswath Damodaran from NYU Stern Business School

This Best Practice includes
1 Excel Model, 1 Webcast Video

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Further information

Outputs:
- Value of equity as a call
- Value of outstanding debt
- Appropriate interest rate for debt
- Risk neutral probability of default

Assumptions:
1. All the assumptions underlying the Black-Scholes model apply
2. The value of the firm is known.


4.5 / 5 (13 votes)

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