Valuing the Option Component of Debt and Its Relevance to DCF-Based Valuation Methods Harvard Case Solution & Analysis

Flows to equity or equity cash flow valuation method is the discounted cash flow method is used to estimate the capital portion of the capital structure. It is closely associated with the venture capital / buyout valuation method, which estimates the IRR of the cash flow stream of the shareholders. Both of these methods can lead to the estimation of the cost of equity, which is too low, when the debts of the company is risky (or, equivalently, IRR, which is too high, depending on the method used to estimate the final cost). This case describes a method for estimating the size of this shift, using insights from option pricing. "Hide
by Lisa Meulbroek 5 pages. Publication Date: March 29, 2001. Prod. #: 201110-PDF-ENG

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Valuing the Option Component of Debt and Its Relevance to DCF-Based Valuation Methods

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