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

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

The flows-to- equity or equity cash flows valuation process is a discounted cash flow approach, which is used to estimate the equity part of the capital structure. It's closely linked with the venture capital/buy out valuation approach, which estimates the IRR of the flow of cash flows.These two approaches are likely to lead to an approximation of equity value that's too low when the company's debt is high-risk (or, equivalently, an IRR that's overly high, determined by the procedure used to estimate terminal value). This case describes a way of estimating the size of this prejudice, drawing insight from option-pricing.

This is just an excerpt. This case is about  FINANCE & ACCOUNTING

PUBLICATION DATE: March 29, 2001 PRODUCT #: 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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