Font Size: a A A

The Valuation Of Venture Capital By Real Option Approach

Posted on:2004-02-20Degree:MasterType:Thesis
Country:ChinaCandidate:L ZhangFull Text:PDF
GTID:2156360092498461Subject:Finance
Abstract/Summary:PDF Full Text Request
This paper illuminates venture capital is very important in the development of national economy, introduces the development condition of venture capital in our country, and clarifies the meaning of this title. We summarize study productions in the venture capital domain, and ascertain the main content in this paper is to review the traditional valuation approaches, to introduce real options theory, to create the valuation model of venture capital project by real options theory, and to confirm the optimal valuation model by analysis of the model.Traditional valuation approaches include certain decision approaches and uncertain decision approaches. Certain decision approaches consist net present value approach, internal rate of return approach and payback period approach. We often ignore the management flexibility and strategy growth in the project and undervalue the project if we value the project by the certain decision approaches. Uncertain decision approaches consist certainty equivalent approach, risk adjusted discount rate approach, sensitivity analysis and decision tree analysis. Because the feature of venture capital is high venture and high income, venture capitalists invest in different stage. Then they have many flexible rights. If we value venture capital by traditional valuation approaches, we will ignore the value of these rights and undervalue the venture capital. So we introduce the concept of real option, use real options to create the valuation approach of venture capital.Real option approach is rising in recent years. We can value the project of management flexibility and strategy growth by real option approach. We introduce concept, species, application process, calculation approach and application in this paper. Professor Stewart Myers said that real option endow investors the rights of acquire or sell a real asset or invest plan by certain price in future. Trigeorgis consider that real options include growth option, defer option, switch scale option, abandon option and switch option. Martha Amram and Nalin Kulatilake believe that the application process of real option include designing the proper frame, using the option pricing model, analyzing the result and designing second frame if necessary. The calculation approaches consist partial differential equation, dynamic programming approach and simulations. With the development of option pricing theory, we can use real option theory in broader domain.Basing on the venture capital stage feature, we assume that a venture capital has two types of investment-staged and lump-sum financing. The project of staged financing has compound growth option; the project of lump-sum financing has simple growth option. When the volatility is constant, we calculate the simple growth option byBlack-Scholes equation, and calculate the compound growth option by Geske equation. Yao-Wen Hsu derived generalized versions of their equations so that options with multiple volatilities can be evaluated.We value a venture capital project by net present value approach and real option approach, and find that the value of compound growth option is maximal. By sensitivity analysis, we recognize much clearly the impact of independent variable to dependent variable in valuation model. It is optimal to use compound growth option valuation model. So venture capitalist should choose stage financing but lump-sum financing.Name: Zhang Li (Finance) Directed by-Yang Chun-peng...
Keywords/Search Tags:venture capitalist, venture entrepreneur, real option, simple growth option, Compound growth option
PDF Full Text Request
Related items