estimated the standard deviations in Eurotunnel stock and
debt using the data over the previous years.
Wealsoestimated acorrelationof 0.5betweenEurotunnel
stockandbondprices,andtheaveragemarketdebt-to-capital
ratioduringthetwo-yearperiodwas85%.Combiningthese
inputs,weestimatedthestandarddeviationinfirmvalueto
be:
In summary, the inputs to the option pricing model were:
Basedontheseinputs,weestimatethefollowingvalueforthe
call:
Eurotunnel’s equity was trading at £150 million in 1997.
Theoptionpricingframework,inadditiontoyieldingavalue
forEurotunnelequity,yieldssomevaluableinsightintothe
driversofvalueforthisequity.Whileitiscertainlyimportant
that thefirmtry to bring costs under controland increase