lowerthanmarketequity.Thisthenpushesupthevaluefor
thesefirms.Whilethismaymaketheaskingpriceattractive
tothesellersofthesefirms,veryfewbuyerswouldbewilling
topaythispriceforthefirm,sinceitwouldrequirethatthe
debtthattheyuseintheirfinancingwouldhavetobebased
onthebookvalue,oftenrequiringtriplingorquadruplingthe
dollar debt in the firm.
4 F. Black and M. Scholes, “The Valuation of Option
Contracts and a Test of Market Efficiency,” Journal of
Finance27 (1972): 399–417.
5 Onachart,thesupportlineusuallyreferstoalowerbound
belowwhichpricesareunlikelytomoveandtheresistance
linereferstotheupperboundabovewhichpricesareunlikely
toventure.Whiletheselevelsareusuallyestimatedusingpast
prices,therangeofvaluesobtainedfromavaluationmodel
can be used to determine theselevels (i.e., the maximum
valuewillbecometheresistancelevelandtheminimumvalue
will become the support line).
6 Most corporate financial theory is constructed on this
premise.