Aswath Damodaran 270
Valuing the Patent
! Inputs to the option pricing model
- Value of the Underlying Asset (S) = PV of Cash Flows from Project if introduced
now = $ 350 million
- Strike Price (K) = Initial Investment needed to introduce the product = $ 500
million
- Variance in Underlying Asset’s Value = ( 0. 25 )^2 = 0. 0625
- Time to expiration = Life of the patent = 17 years
- Dividend Yield = 1 /Life of the patent = 1 / 17 = 5. 88 %
- Assume that the 17 - year riskless rate is 4 %. The value of the option can be
estimated as follows:
! Call Value= 350 exp(-^0.^0588 )(^17 ) ( 0. 5285 ) - 500 (exp(-^0.^04 )(^17 ) ( 0. 1219 )= $ 37. 12
million
We are assuming that if the option goes in the money, there is a cost of not
exercising (which is the dividend yield) equivalent to losing 1 of the remaining
years of patent protection. (1/17 this year, 1/16 next year....)
