Valuing the form and its equity : a cash flow contingent claims approach
Valuing the form and its equity : a cash flow contingent claims approach
The aim of the thesis is to value a firm or its equity in the context of contingent claims analysis (CCA). Since CCA depends on the validity of 'market price' of an underlying asset, there may be a limitation arising when the underlying asset is not traded or is not fairly valued. To overcome this limitation, the thesis uses the cash flow process of the underlying asset to replace the market price process of the underlying asset in CCA. I assume that the equilibrium value of the asset is determined by investors' homogeneous expectations about the asset's cash flows. I am calling this method 'the cash flow CCA'.
The thesis is based on four essays. The first two essays provide background theories which enable the pricing of options plus a literature review on stochastic cash flows and real options. The last two essays are applications of the cash flow CCA to value equity and a growth firm.
The contribution of this thesis has several aspects.
1. The cash flow CCA which combines the consideration of cash flows with the features of CCA is used for the first time in valuing 'equity as a call option'. It improves the DCF technique which fails to consider the added value of shareholders' limited downward risk.
2. The cash flow CCA allows us to value a firm and its sequential growth options with 'uncertain investment costs' and 'uncertain investment yield'. The uncertain investment costs are inter-dependent and endogenously determined by the firm's uncertain cash flows and investment policy.
3. A joint review of stochastic cash flows and of real options facilitates an under-standing of how a firm should be valued. The link between these two topics for valuing a firm (a project) is pointed out for the first time.
4. A pedagogic note on option pricing explains differences between the CAPM approach and the no-arbitrage pricing method.
University of Southampton
1998
Chang, Shou-Wei
(1998)
Valuing the form and its equity : a cash flow contingent claims approach.
University of Southampton, Doctoral Thesis.
Record type:
Thesis
(Doctoral)
Abstract
The aim of the thesis is to value a firm or its equity in the context of contingent claims analysis (CCA). Since CCA depends on the validity of 'market price' of an underlying asset, there may be a limitation arising when the underlying asset is not traded or is not fairly valued. To overcome this limitation, the thesis uses the cash flow process of the underlying asset to replace the market price process of the underlying asset in CCA. I assume that the equilibrium value of the asset is determined by investors' homogeneous expectations about the asset's cash flows. I am calling this method 'the cash flow CCA'.
The thesis is based on four essays. The first two essays provide background theories which enable the pricing of options plus a literature review on stochastic cash flows and real options. The last two essays are applications of the cash flow CCA to value equity and a growth firm.
The contribution of this thesis has several aspects.
1. The cash flow CCA which combines the consideration of cash flows with the features of CCA is used for the first time in valuing 'equity as a call option'. It improves the DCF technique which fails to consider the added value of shareholders' limited downward risk.
2. The cash flow CCA allows us to value a firm and its sequential growth options with 'uncertain investment costs' and 'uncertain investment yield'. The uncertain investment costs are inter-dependent and endogenously determined by the firm's uncertain cash flows and investment policy.
3. A joint review of stochastic cash flows and of real options facilitates an under-standing of how a firm should be valued. The link between these two topics for valuing a firm (a project) is pointed out for the first time.
4. A pedagogic note on option pricing explains differences between the CAPM approach and the no-arbitrage pricing method.
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Published date: 1998
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Local EPrints ID: 463526
URI: http://eprints.soton.ac.uk/id/eprint/463526
PURE UUID: ea0dbd5f-e49c-49ad-81d6-8ebdb8ab1ed9
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Date deposited: 04 Jul 2022 20:53
Last modified: 04 Jul 2022 20:53
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Author:
Shou-Wei Chang
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