Learn the Option Pricing Theory That Helps in Improving Value of Equity
If a particular company is running in losses then calculating the value of the equity for that particular company is definitely not easy. This type of a company in most cases will also have a huge debt. Even calculating the value of equity for a startup company can be equally difficult.
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Traditional valuation methods find it difficult to find out the equity value
If you follow Traditional Valuation method, then it might be very difficult for you to find out equity value of startup companies as well as those companies that are running in losses.This is because this theory is not able to accommodate the concept of “What if.”
For example, let’s first take the example of a new company. Here when trying to find out the value, you have to take the “What if” factor into consideration. What if a particular idea works out for a particular company or what if a particular idea does not work out for a company? If an idea works then the value of equity for that company will rise, and if the plan does not work out,then the value of equity will fall.
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Option pricing theory helps in determining equity value
According to option pricing theory, the value of equity will severely drop if a particular company is on the verge of closing down. Even shareholder stakes for that company will be wiped out completely in all such circumstances. So even if that company at that point in time has a face value of 40 million dollars and an actual value of 10 million dollars even then equity value will be 0.
The reason for this is that debt of the company has a certain lifespan and during this period a company might become feasible again. This is the time which is of immense importance to external investors. For example, a particular company which is an expert in handling distress situations will be interested in getting details about the value of this company.
Interest rates for this company will certainly rise because investing in this company involves a lot of risk and lenders need to be compensated for the risk that they are taking. I do understand that for a student these concepts might be a little difficult to understand and so taking the contribution of the options theory to the valuation of equity assignment help will certainly be a very good choice.
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