Fundamental Capital Valuation for IT Companies: A Real Options Approach

26 Pages Posted: 27 Nov 2009

See all articles by Chung Baek

Chung Baek

Troy State University at Dothan

Brice V. Dupoyet

Florida International University - College of Business Administration - Finance

Arun J. Prakash

Florida International University (FIU) - Department of Finance; Florida International University

Multiple version iconThere are 2 versions of this paper

Date Written: April 1, 2008

Abstract

This study attempts to estimate the fundamental capital value of a growing firm by combining two separate capital valuation techniques, namely the corporate debt valuation of Merton (1974) and the rational pricing technique of internet companies of Schwartz and Moon (2000). For simplicity, the Black and Scholes (1973) approach is used to infer an estimate of the value of the debt of the firm, while the valuation technique of Schwartz and Moon (2000) has been used to estimate the total value of the firm. Making use of the fact that firm value is a function of the value of debt and equity, we first derive a closed-form solution for the value of the debt and then estimate the implied fundamental equity values for sample firms in the information technology sector, and show how the share prices are either undervalued or overvalued.Inferences on the risk premium on the debt are also provided.

Keywords: Fundamental valuation, Real options, Monte Carlo simulation

JEL Classification: G3, G12, G31, M13, M41

Suggested Citation

Baek, Chung and Dupoyet, Brice and Prakash, Arun Jai, Fundamental Capital Valuation for IT Companies: A Real Options Approach (April 1, 2008). Frontiers in Finance and Economics, Vol. 5, No. 1, pp. 1-26, 2008. Available at SSRN: https://ssrn.com/abstract=1512523

Chung Baek

Troy State University at Dothan ( email )

500 University Drive
217 Malone Hall
Dothan, AL 36304
United States

Brice Dupoyet

Florida International University - College of Business Administration - Finance ( email )

University Park, RB 209 A
11200 SW 8th Street
Miami, FL 33199
United States
305-348-3328 (Phone)
305-348-4245 (Fax)

Arun Jai Prakash (Contact Author)

Florida International University (FIU) - Department of Finance ( email )

University Park
11200 SW 8th Street
Miami, FL 33199
United States

Florida International University ( email )

Miami, FL 33199
United States

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