On the Valuation of Companies with Growth Opportunities

Journal of Applied Economics, Vol. 6, No. 1, pp. 49-72, May 2003

Posted: 20 Jun 2004

Abstract

Each company faces day to day investment opportunities. Just by staying in business the company is taking a decision of reinvesting capital. These opportunities have to be fairly valued to overcome misallocation of resources. A project with high growth opportunities requires high reinvestments to take full advantage of them until it reaches its mature stage. These investments can be seen as a succession of call options on future growth. When a company with such prospects is valued using the discounted cash flow technique and growth is taken implicitly in the growing cash flows and the residual value, the value thus obtained will be higher than the true one (under certain circumstances). Technology advances and the effects of globalization create enormous growth opportunities, and so misvaluation risks are higher.

Keywords: Real options, valuation, contingent claims valuation

JEL Classification: G12

Suggested Citation

Dapena, José Pablo, On the Valuation of Companies with Growth Opportunities. Journal of Applied Economics, Vol. 6, No. 1, pp. 49-72, May 2003. Available at SSRN: https://ssrn.com/abstract=556985

José Pablo Dapena (Contact Author)

University of CEMA ( email )

1054 Buenos Aires
Argentina

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