Episode Details

In today’s class, we completed our discussion of real options, starting with an analysis of why the option to abandon and financial flexibility can be viewed as options, and how to value them. We then turned our attention to distressed equity, and why stock in a highly levered, money losing firm can become an option, and why it matters for investors. Since the value of distressed equity as an option rests on having a lot of debt, you will not find much use for it on your project, unless you happening to be valuing a company where there is negative earnings or the threat of negative earnings and a lot of debt. If you do, you may find this spreadsheet useful in getting that option value:
http://www.stern.nyu.edu/~adamodar/pc/equity.xlsx

Start of the class test: http://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/realoption2mod.pdf
Slides: http://www.stern.nyu.edu/~adamodar/podcasts/valspr21/session23slides.pdf
Post class test: http://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/postclass/session23test.pdf
Post class test solution: http://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/postclass/session23soln.pdf

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