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D@VALUING EQUITY AS AN OPTION<This program calculates the value of equity as a call option$on the value of the underlying firm.Assumptions?1. All the assumptions underlying the Black-Scholes model apply"2. The value of the firm is known.-The user has to input the following variables42. Variance in the ln(value) of the underlying firm.&3. Face Value of the outstanding debt.G4. Riskless interest rate that corresponds to average duration of debt.D5. Face-value weighted duration of the debt outstanding of the firm.46. Expected dividend yield on the stock of the firm.$Inputs relating the underlying asset=Enter the standard deviation in the firm's stock price (ln) =<Enter the standard deviation in the firm's bond price (ln) =9Enter the correlation between the stock and bond prices =GEnter the average D/(D+E) ratio during the variance estimation period =(in %)No(Yes or No)EIf yes, enter the annualized standard deviation in ln(value) of asset;Enter the current annualized dividends on the stock (total)'This will result in a dividend yield ofEDo you want to change this dividend yield for the life of the option?AIf yes, enter the new dividend yield for the life of the option =Inputs relating to the option4Enter the cumulated face value of outstanding debt ='[Add coupons to the face value of debt]0Enter the average duration of outstanding debt =
(in years)((Weighted by the face value of the debt)General InputsAEnter the riskless rate that corresponds to the option lifetime =T.Bond rate=
Strike Price= Variance=Expiration (in years) =Annualized dividend yield=d1 =N(d1) =d2 =N(d2) =Value of equity as a call =Value of outstanding debt =$Appropriate interest rate for debt =Enter the value of the firm =81. Current value of the underlying firm (or its assets).-Are the stocks and bonds of this firm traded?Stock & Bond Price VarianceThere are two ways of estimating standard deviation. One is to use the firm's own stock and bond prices to estimate it. The other is to use the variance of the industry to which your firm belongs.(Industry average variance in firm value :Which approach would you like to use to estimate variance?3Based upon these inputs, the standard deviation is=Output(from Damodaran's web site)IFirm Per share(Based on Medical Services)
(in millions)Asset Price=Square of SDsharesDuration of the debtB
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<Aswath Damodaran:
This is the value of the assets of the firm. It can be estimated using by discounting the expected cash flows from the assets at the cost of capital.<
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V<WAswath Damodaran:
This is the annualized standard deviation in the firm's stock price.<
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If they are both traded, and you can access the historical data, answer yes.<
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M<NAswath Damodaran:
This is the annualized standard deviation in the bon price.<
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H<IAswath Damodaran:
This is the correlation between stock and bond prices.<
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This is the average market value debt to capital ratio of the firm for the period that you estimated stock and bond price variances.<
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y<zAswath Damodaran:
If you have the data on stock and bond prices, enter F. If you want to use the industry average, use I.<
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o<pAswath Damodaran:
DO NOT INPUT. This is provided so that you can see what the final standard deviation will be.<
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i<jAswath Damodaran:
Enter the standard deviation in firm value for the industry to which your firm belongs.<
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@<AAswath Damodaran:
Enter the total dividends paid (on all equity)<
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[<\Aswath Damodaran:
Add coupons to the face value of all debt outstanding, in nominal terms. <
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B<CAswath Damodaran:
Enter the weighted average duration of the debt.<
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If there is a potential for change in the firm's dividend policy, enter yes.<
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4<5Aswath Damodaran:
Enter the expected dividend yield.<
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9<:Aswath Damodaran:
Enter the current government bond rate.<
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