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Real Asset Valuation: A Back-to-basics Approach

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  • David Laughton
  • Raul Guerrero
  • Donald Lessard

Abstract

Different valuation methods can lead to different corporate investment decisions, and the conventional "static, single discount rate" DCF approach in particular is biased against many of the kinds of decisions that corporate managers tend to view as "strategic." Reducing the bias from valuations involves two main tasks: treating risk in a way that is consistent with observed market pricing, and accounting for the ability of companies to make decisions "dynamically" over time. The authors propose two separate tools, market-based valuation and complete decision tree analysis, for accomplishing these two improvements in valuation. Copyright (c) 2008 Morgan Stanley.

Suggested Citation

  • David Laughton & Raul Guerrero & Donald Lessard, 2008. "Real Asset Valuation: A Back-to-basics Approach," Journal of Applied Corporate Finance, Morgan Stanley, vol. 20(2), pages 46-65.
  • Handle: RePEc:bla:jacrfn:v:20:y:2008:i:2:p:46-65
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    References listed on IDEAS

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    1. Longstaff, Francis A & Schwartz, Eduardo S, 2001. "Valuing American Options by Simulation: A Simple Least-Squares Approach," Review of Financial Studies, Society for Financial Studies, vol. 14(1), pages 113-147.
    2. Robert C. Merton, 2005. "Theory of rational option pricing," World Scientific Book Chapters,in: Theory Of Valuation, chapter 8, pages 229-288 World Scientific Publishing Co. Pte. Ltd..
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    5. Helyette Geman, 2005. "Commodities and Commodity Derivatives. Modeling and Pricing for Agriculturals, Metals and Energy," Post-Print halshs-00144182, HAL.
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    7. Adam Borison, 2005. "Real Options Analysis: Where Are the Emperor's Clothes?," Journal of Applied Corporate Finance, Morgan Stanley, vol. 17(2), pages 17-31.
    8. James E. Smith & Robert F. Nau, 1995. "Valuing Risky Projects: Option Pricing Theory and Decision Analysis," Management Science, INFORMS, vol. 41(5), pages 795-816, May.
    9. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    10. Longstaff, Francis A & Schwartz, Eduardo S, 2001. "Valuing American Options by Simulation: A Simple Least-Squares Approach," University of California at Los Angeles, Anderson Graduate School of Management qt43n1k4jb, Anderson Graduate School of Management, UCLA.
    11. repec:dau:papers:123456789/607 is not listed on IDEAS
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    Cited by:

    1. Christian Koziol, 2014. "A simple correction of the WACC discount rate for default risk and bankruptcy costs," Review of Quantitative Finance and Accounting, Springer, vol. 42(4), pages 653-666, May.
    2. Donald R. Lessard & Roger Miller, 2013. "The shaping of large engineering projects," Chapters,in: International Handbook on Mega-Projects, chapter 3, pages 34-56 Edward Elgar Publishing.

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