Limited liabilities option valuation model

Authors

  • Силвије Орсаг Faculty of Economics, University of Zagreb

Keywords:

Limited liabilities, option valuation model, principal as a call option on company assets, principal as a put option on company assets

Abstract

Limited liabilities are ofen viewed as the valuable protection of personal property to the investors in equity instruments. Tere are several approaches for valuing limited liabilities. One of them is value of insurance, both, as the value of comparable insurance policy, and as actuary pricing of risk associated with limited liabilities. Another approach is traditional present value of expected cash ?ows techniques. In this paper value of limited liabilities are analyzed with the third approach, option valuing techniques. Using the option value approach I identifed two options associated with limited liabilities: call and put options in share of equity on total assets of over-indebted company. From this approach risky debt can be viewed as risk free debt minus value of call option associated in share of equity. From the put-call parity it is also stated that risky debt can be viewed as risk free debt minus value of put option associated in share of equity. From this viewpoint it is better to understand nature of risky debt, nature of agency problem between company owners and company creditors, and nature of state guaranties given to the fallen business.

Downloads

Download data is not yet available.

References

Martha, A., Kulatilaka, N. (1999). Real Options: Managing Strategic Investment in an Uncertain World. Boston: Harvard Business School Press

Amar, B. Why Not Leverage Your Company to the Hilt. Harvard Business Review, 3/88

Brealey, R. A., Myers, S. C. (2000). Principles of Corporate Finance. 6. Edit., Boston: Irwin, McGraw-Hill

Brigham, E. F., Houston, J. F. (2004). Fundamentals of Financial Management. 10 edit. Austin: Tomson, South-Western

Copeland, T E., Weston, J. F., Shastri, K. (2005). Financial Theory and Corporate Policy. 4. edit. Boston: Pearson Addison Wesley

Copeland, T. E. Antikarov, V. (2001). Real Options: A Practitioner’s Guide. New York: Texere

Dixit, A., Pindyck, R. (1994). .Investment Under Uncertainty. Princeton: Princeton University Press

Fama, E. F. (1965). The Behavior of Stock Prices. Journal of Business

Fama, E. F. (1970). Efficient Capital Markets: A Review of Theory and Empirical Work, Journal of Business

Fisher, I. (1930). The Theory of Interest

Jensen, M. C. (1986). Agency Costs of Free Cash Flow, Corporate Finance and Takeovers“, American Economic Review 26

Jensen, M. C. (1972). Capital Market Theory and Evidence, Bell Journal of Economics and Management Science, Autumn,

Jensen, M. C., Mackling, W. H. (1976). Theory of the Firm, Managerial Behavior, Agency Costs and Ownership Structure, Journal of Financial Economics

Moore, W. T. (2001).Real Options and Option-embedded Securities. New York: John Wiley & Sons,

Myers, S., Turnbull, S. M. (1977). Determinants of Corporate Borrowing Journal of Financial Economics, 5, November

Myers, S., Turnbull, S. M. (1977). Capital Budgeting and the Capital Asset Pricing Model; Good News and Bad News, Journal of Finance

Орсаг, С. (2011). Финанцијско извјештавање између управе и инвеститора. Зборник радова с 15. конгреса: Рефлексије међународних стандарда финанцијског извјештавања на рачуноводство, ревизију и пословне финанције, Савез рачуновођа и ревизора Републике Српске

Орсаг, С. (2006). Изведенице. Загреб: Хрватска удруга финанцијских аналитичара

Орсаг, С. (2007). Опцијски приступ анализи проблема агената, у зборнику с међународног научног симпозија Финанције у друштву знања и савременој пословној пракси. Тузла: Универзитет у Тузли, Економски факултет

Орсаг, С. (2000). Опцијски приступ акцијама, у зборнику Рачуноводство ревизија и финанције у сувременим господарским увјетима, Хрватска заједница рачуновођа и финанцијских дјелатника, Загреб,

Орсаг, С. ( 2011). Вриједносни папири, инвестиције и инструменти финанцирања. Сарајево: Ревицон

Rajan, R., Zingales, L. (1998).Debt, folklore and fnancial structure, u zborniku Mastering Finance. London: Financial Times Prentice Hall

Ross, S. A., Westerfeld, W., Jaffe, J. F. (2006). Corporate Finance. 8 edit. McGraw-Hill

Schwartz, E. S., Moon, М. (2000). Rational Pricing of Internet Companies, Financial Analysts Journal, Association for Investment Management and Research

Trigeorgis, L. (1996). Real Options: Managerial Flexibility and Strategy in Resource Allocation. Cambridge: The MIT Press

Downloads

Published

2012-02-29

How to Cite

Орсаг, С. (2012). Limited liabilities option valuation model. Acta Economica, 10(16), 45–67. Retrieved from http://ae.ef.unibl.org/index.php/AE/article/view/134

Issue

Section

Preliminary Communication