The Valuation of a Firm Advertising Optimally

Quarterly Review of Economics and Finance, Vol. 38 No. 2, Summer 1998

WBS Finance Group Research Paper No. 1

Posted: 3 May 1998

See all articles by Paul Wilmott

Paul Wilmott

University of Oxford - Nomura Centre for Mathematical Finance

A. Elizabeth Whalley

University of Warwick - Finance Group

Philipp Schönbucher

ETH Zürich - Department of Mathematics

Nick Mayor

ABN Amro

David Epstein

J.P. Morgan Chase & Co.

Abstract

In this paper we model the value of a firm based on its current earnings and cash balances. The value is modelled on the assumption that earnings follow a mean-reverting process. The effect of advertising on earnings is modelled, and the condition for optimal advertising derived. The value of the firm is derived as the solution to a partial differential equation. The way in which this value depends on the legal structure and banking arrangements of the firm is discussed.

JEL Classification: G30, L15

Suggested Citation

Wilmott, Paul and Whalley, A. Elizabeth and Schönbucher, Philipp J. and Mayor, Nick and Epstein, David, The Valuation of a Firm Advertising Optimally. Quarterly Review of Economics and Finance, Vol. 38 No. 2, Summer 1998; WBS Finance Group Research Paper No. 1. Available at SSRN: https://ssrn.com/abstract=52501

Paul Wilmott (Contact Author)

University of Oxford - Nomura Centre for Mathematical Finance ( email )

OCIAM Mathematical Institute
24-29 St Giles 24-29 St. Giles
Oxford OX1 3LB
United Kingdom
44(1)1483 532647 (Phone)

A. Elizabeth Whalley

University of Warwick - Finance Group ( email )

Warwick Business School
University of Warwick
Coventry, CV4 7AL
Great Britain

Philipp J. Schönbucher

ETH Zürich - Department of Mathematics ( email )

ETH Zentrum HG-F 42.1
Raemistr. 101
CH-8092 Zurich, 8092
Switzerland
+41 1 6326409 (Phone)

HOME PAGE: http://www.schonbucher.de

Nick Mayor

ABN Amro

1000 EA Amsterdam, NY
Netherlands

David Epstein

J.P. Morgan Chase & Co. ( email )

60 Wall St.
New York, NY 10260
United States

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