Talking About The Application Of Real Option In Valuation Of Enterprise

The dissertation researches on the application of real option in valuation of the enterprise. The traditional method of valuing investments is discount cash flow. This kind of method considers time value, and is understood easily, so it is accepted by the investment decision makers for a long time. In the backgrounds that the economic environment is more stable, and the cash flow of enterprise is predictable, this kind of method is rather proper. But this method neglects of uncertainty, reversibility of investments and flexibility of management. Under the circumstances that investment risks turn worse and worse, the income of business enterprise in the future is hard to be expected, this method is hard to apply. However, the real option raised in 1970's , overcomes the weakness of the traditional method, and makes use of the basic principle of the financial option to the investment decision and worth valuation of the enterprise, giving decision makers a kind of option of changing the decision in the future according to the market circumstance.Since Myers(1977) put forward the concept of the real option, the real option theories got a substantial development. More and more scholars make much study and analysis in the classification, pricing and application of real option. On classfication, real option mainly haves: deferral option, abandonment option, convert option and growth option etc. At the pricing aspect, although the object of the real option is the item or enterprise, which is nonexistent bargain market, also for the problem of the nonexistent arbitrage. But the real assets can be considered to be traded by themselves, so under the same assumption conditions of the DCF method, the standard pricing model of real option can be deduced to use the pricing model of the financial option, for example the B-S model and binomial equation model. With the development of real option pricing theories, the real option has already got an extensive application. Now real option have already been applied in mineral energy, real estate, city development construction, environmental protection, research development(R&D), financing institution, shipping...etcIn our country, because the stock market begin recently, most listed companies are in investment construction period, the capital expenditure is great, and the cash flow often is negative, so it is hard to evaluate value of company with discount cash flow. Under the limited liability property of the company, the company ownership of a share can be considered to be a call option that the shareholders own, the underlying asset is company valuation, and the valuation of debt is exercise price. So company valuation can be computed by using the price principle of real option. The dissertation adopts the DCF method and B-S option price model to compute share value of listing company- JU LUN GUF REN (002031) respectively. The result confirms that the real option method is more suitable for the share value.