Estimating the Value of Equity as an Option
The examples we have used thus far to illustrate the
application ofoptionpricingto valueequityhaveincluded
some simplifyingassumptions. Amongthem arethesefour
assumptions:
1.Thereareonly twoclaimholdersin thefirm—debtand
equity.
2.Thereisonlyoneissueofdebtoutstandinganditcanbe
retired at face value.
- The debt has a zero coupon and no special features
(convertibility, put clauses, etc.).