A General Method for Valuing Complex Capital Structures
15 Pages Posted: 30 Apr 2019 Last revised: 22 Jul 2019
Date Written: July 21, 2019
We develop a numerical method based on the Cox et al. (1979) binomial tree option valuation approach that can accommodate arbitrarily complex capital structures with varying debt maturities and seniorities, as well as preferred stock and warrants. The method provides straightforward valuation for common bond market features such as convertibility and prepayment options, as well as sinking fund provisions, that have proven challenging to model analytically.
Keywords: Capital Structure, Binomial Trees, Derivatives Pricing
JEL Classification: G12, G13, G32
Suggested Citation: Suggested Citation
Borochin, Paul and Kopeliovich, Yaacov and Shea, Kevin, A General Method for Valuing Complex Capital Structures (July 21, 2019). Available at SSRN: https://ssrn.com/abstract=3366559 or http://dx.doi.org/10.2139/ssrn.3366559
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