A General Method for Valuing Complex Capital Structures

15 Pages Posted: 30 Apr 2019 Last revised: 22 Jul 2019

See all articles by Paul Borochin

Paul Borochin

University of Miami - Department of Finance

Yaacov Kopeliovich

University of Connecticut - Department of Finance

Kevin Shea

Disciplined Alpha

Date Written: July 21, 2019

Abstract

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

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

Paul Borochin (Contact Author)

University of Miami - Department of Finance ( email )

P.O. Box 248094
Coral Gables, FL 33124-6552
United States

Yaacov Kopeliovich

University of Connecticut - Department of Finance ( email )

School of Business
2100 Hillside Road
Storrs, CT 06269
United States

Kevin Shea

Disciplined Alpha ( email )

Alpha,One Marina Park Drive Suite 1490
Boston, MA 02210
United States

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