Valuation of the Liability Structure by Real Options

3Applications of Real Options on Financial Structure Valuation

3.1. Introduction

The two studies presented in this chapter aim, first, to valuate samples of companies following the traditional methods¹ and following the real options approach. Next, statistical tests were performed in order to analyze the performance of the real options approach with respect to the methods used in practice by financial analysts. The objective is therefore to determine if the application of real options to the structure of liabilities can be a valuation method that complements traditional methods, that is, to know if the real options approach is dependable and pertinent. Real options in fact account for the economic value of the net debt and not its accounting sum, the average maturity of the debt, the volatility of assets and the probability of bankruptcy. In this context, it is possible that traditional valuations underestimate the growth potential of equity. Calculations at intervals of confidence and significance tests were thus made. The major differences between real options and the currently widespread approaches concern, in the case of real options, the inclusion of an economic net debt considering its maturity and the volatility of assets. The bankruptcy probability calculations and the rate of recovery complete the preliminary calculations.

The two studies can be distinguished by the nature of the sample. The idea was first to compare the approach of real options with the DCF method ...