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Profitability, balance sheet data, real options and the valuation of equity

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Author Info

  • Herbert, Ian

    ()
    (Business School, Loughborough University)

  • Shinozawa, Yoshikatsu

    ()
    (Business School, Loughborough University)

  • Tippett, Mark

    ()
    (Business School, Loughborough University)

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    Abstract

    We illustrate the impact that real options generally available to firms can have on the value of corporate equity, and in particular the valuation errors that are likely to arise from ignoring them. Moreover, we develop real option values in terms of the profitability and balance sheet (bookkeeping) measures that appear on published corporate financial statements. Our analysis is conducted in terms of two of the more generally understood real options available to firms; namely, the option to liquidate (or abandon) a firm’s current productive activities and the option to implement (or delay) the unexploited but potentially profitable capital projects that are available to it.

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    Bibliographic Info

    Article provided by Capco Institute in its journal Journal of Financial Transformation.

    Volume (Year): 22 (2008)
    Issue (Month): ()
    Pages: 195-201

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    Handle: RePEc:ris:jofitr:0846

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    Keywords: cash flow; cost of capital; equity; real options;

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