Real option approach to equity valuation
Real option approach to equity valuation

Summary/Abstract: The paper presents an option approach to the valuation of equity as an alternative to the method based on the discounted cash flows valuation. In the first part of the paper, the essence and the basic types of real options as well as valuation models are presented. Then the article explains how to treat the equity as a European call option issued on the value of the entire enterprise, where issuers are creditors and option holders are shareholders. The last part of the article includes a case study that explains the impact of risk and other factors on the value of equity and illustrates the valuation of equity using the Black- Scholes option pricing model.

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