PPT Slide

Estimation of firm value V and

volatility of firm value sV

• Usually, only the price of equity for most public firms is directly

observable, and in some cases, part of the debt is directly traded.

• Using option pricing approach:

equity value, E = f(V, sV, K, c, r)

and

volatility of equity, sE = g(V, sV, K, c, r)

where K denotes the leverage ratio in the capital structure, c is the

average coupon paid on the long-term debt, r is the riskfree rate.

• Solve for V and sE from the above 2 equations.