6 Since the return on capital is the product of after-tax
operatingmarginandthesalesturnoverratio,this approach
allowsbrandnamecompaniestwopathwaystohighervalue.
Inthefirst,theychargehigherpricesforthesameproducts
andearnhighermargins.Inthesecond,theychargesimilar
prices but are able to sell more of their product, thus
increasing sales turnover ratios.
7 P. Fernandez, “Valuation of Brands and Intellectual
Capital,” working paper, SSRN, 2001.
8 Withabinomialmodel,weestimateavalueof$915million
for the same option.
9 The following is a simplified version of the illustration
providedbySiegel,Smith,andPaddocktovalueanoffshore
oil property. See D. Siegel, J. Smith, and J. Paddock,
“Valuing Offshore Oil Properties with Option Pricing
Models,”inTheNewCorporateFinance,ed.D.H.ChewJr.
(New York: McGraw-Hill, 1993).
10 For simplicity,we will assume that while this marginal
valueperbarrelofoilwillgrowovertime,thepresentvalue
of the marginal value will remain unchanged at $12 per
barrel.Ifwedonot makethisassumption,wewillhaveto
estimatethepresentvalueoftheoilthatwillbeextractedover
the extraction period.
11 Inthisexample,weassumethattheonlyuncertaintyisin
the price of oil and the variance therefore becomes the
variance in ln(oil prices).