Research On Application Of Real Options Method On Equity Valuation

Corporate valuation theory is not only a main ramification of moderncorporate finance theory, but also an integrated part of financial economics.Understanding and valuating a corporation's value are both the premises ofeconomical activities, and core issues of investment in real and financialassets.Option is a standardized contract and the option holder has the right, butnot the obligation to buy (or sell) a certain amount of underlying assets in thefuture. Real option is the extension and development of financial option in thearea of real asset valuation and pricing research.Started from the equity's option characteristic that comes from thelimited obligation feature of modern corporations, the paper analyzed therelationship between equity and option, and then analyzed the applicabilityproblem of putting BS model into pricing equity. And the issues in theassumption satisfaction and parameter estimation are discussed. Finally, thevalues of equity and intrinsic prices of stocks for 1223 companies listed inSSE and SZSE are computed with BS model. The result is that the pricescomputed have some guidance over the actual price.The paper had done some instructive exploration in the combinationbetween option pricing theory and corporate valuation, specifically, equityvaluation and stock pricing with BS model. It will promote the application ofBS model.