thefirmwilltrulyhavetopayoutoverthelifeofthedebt,
sincetherewillbecoupon paymentsandinterest payments
during the period.
2.Attheotherextreme,wecouldadd theexpectedinterest
andcouponpaymentsthatwillcomedueonthedebttothe
principalpaymentstocomeupwithacumulatedfacevalueof
debt.Sincetheinterestpaymentsoccurinthenearyearsand
theprincipalpaymentsaredueonlywhenthedebtcomesdue,
wearemixingcashflowsupatdifferentpointsintimewhen
wedothis.Thisis,however,thesimplestapproachofdealing
with intermediate interest payments coming due.
3.Wecanconsideronlytheprincipaldueonthedebtasthe
facevalueofthedebt,andtheinterestpaymentseachyear,
specifiedasapercentoffirmvalue,cantaketheplaceofthe
dividend yieldin theoptionpricing model.In effect, each
yearthatthefirmremainsinexistence,wewouldexpectto
seethevalueofthefirmdeclinebytheexpectedpaymentson
the debt.
ILLUSTRATION 17.12: Valuing Equity as an Option:
Eurotunnel in 1997
Eurotunnel was the firm that was created to build and
ultimatelyprofitfromthetunnelundertheEnglishChannel,
linking England and France. The tunnel was readied for
operationsintheearly1990s,butitwasneveracommercial
success and reported significant losses each year after
opening.Inearly1998,Eurotunnelhadabookvalueofequity
of−£117million,andin1997,thefirmhadreportedearnings
beforeinterestandtaxesof−£3.45millionandnetincomeof