The Applications Of Option Theory In The Corporate Financing

Capital is the blood of an enterprise. Of the series of financial affairs of a corporation, raising capital is the precondition and foundation. In order to satisfying the need of operating, investments, optimizing its capital structure, the corporation has to raise funds through effective, efficient and economical financing ways and instruments. The dissertation applies the option theory and practice to corporate financing activities, which expatiates on the application of option in valuating the corporation, dividing the profit between shareholders and creditors, analyzing the financing risk, pricing the financing instruments and so on. During this course, conclusions and exercisable suggestions are brought forward to the financing practice of enterprises. Furthermore, the dissertation gives a real instance named 'LYON' to point out the essentiality and necessity of using the option to carry on the financing instruments innovation. All the efforts we made here is to research how a corporation can make accurate financing decisions with the help of the option theory. The structure of this dissertation is clear. It mainly includes three parts. First part provides a brief introduction to the option theory and its valuation ways, which is the academic base of the following text. Due to its characteristics, option could become a useful instrument for corporate financing analysis. Meanwhile, there are some key points worthwhile to pay attention to when the theory is applied into practice. In the second part, based on the option, systemic analysis is made to the financing process of a corporation. Discussion is around catholicity of the process. As both the equity capital and liability capital have the quality of option, we evaluate them and the enterprise assets with option methods. In terms of call option, we evaluate the effect of the use of finance lever. Throughout the analysis of enterprise valuation, financing risk conditions, and the effect on shareholders and creditors caused by the change of capital structure are stressed. What's more, the option methods are brought into the decision-making process for dividend distribution policies. At last part, attention is paid to special analysis and discussion of the option qualities included in the financing ways and instruments. It is also found that the option qualities almost cover the whole corporate financing process. Corporations should recognize and make good use of the option methods. A detailed case is showed to explain the option play an important role in the innovation of financing instruments as an end.