Applications of Option Valuation


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–          The equity of a firm with debt in its capital structure is actually a call option if interest and principal are paid to creditors, shareholders own the underlying assets of the firm; if interest and principal are defaulted, creditors will end up with the assets.

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–          If the So/X ratio is high, the option is well in the money, which implies a low proportion of debt in the company’s capital structure. If low the company has lots of debt.

–          An increase in σ means that the operating assets of the firm are more risky.

–          Specific actions taken by geared companies can shift wealth from debt holders to shareholders.

 

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We, at BMS.co.in, believe in sharing knowledge and giving quality information to our BMS students. We are here to provide and update you with every details required by you BMSites! If you want to join us, please mail to contact@bms.co.in.

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