Valuation of the Target Company Using the Black–Scholes Model

In the framework of a merger and acquisition (M&A), a real call option gives the acquiring company the right, not the obligation, to acquire the target during the time the call option is valid.

As discussed in Chapter 9, one could use a real call option in valuing a target company. Here, we consider the Black–Scholes model for option pricing by first using an example of an option involving stocks and then by another example that illustrates valuation of a potential target firm.

Black and Scholes (1973) developed a model for pricing the fair value of European options. The model is a partial differential equation, which describes the dynamics of option price adjustment within ...

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