Real option approach to business valuation (PDF)

Seminar paper from the year 2013 in the subject Business economics - Business Management, Corporate Governance, grade: 1,6, University of Applied Sciences Essen, language: English, abstract: There are various events to which a company valuation must be created. For the valuation of companies, various valuation methods are available. Most of these approaches are static calculation methods such as the discounted cash flow method. This method is one of the static corporate policies. The response to newly acquired information can not be taken into account and therefore lead to lower ratings from this approach and all other static approaches. This is especially true for young, innovative and dynamic company.

To better match the DCF method to the uncertain development of the future, various scenarios can be simulated with different parameters. Nevertheless, there is a reporting date and the mutual influence of the variables can not be adequately represented.

The real options approach, which was originally used only for the investment calculation can, also be applied to companies because the company valuation represents a special case of investment analysis. In the boom times of the new economy around the turn of the century was said to have the ROA that it would be a concept that justifies artificial-ly increased corporate values. For this period, the most of literature that deals with the real options approach comes from.

With the ROA no independent valuation method is presented, but an extension of the familiar discounted cash flow method. The crux of the extension is the evaluation of action flexibilities in the otherwise static method.

The aim of this study is to investigate the real options approach for its suitability as a business valuation method and to identify its strengths and weaknesses.