Pricing the equity of a firm using extendible options

  1. María Isabel Abínzano Guillén
  2. Javier F. Navas
Revista de economía financiera

ISSN: 1697-9761

Year of publication: 2008

Issue: 15

Pages: 22-48

Type: Article

More publications in: Revista de economía financiera


When a company is in financial distress, debt restructuring is one possible course of action. In this paper we propose a model for pricing equity when the firm can carry on a reorganization of its capital structure. The valuation formulae we obtain are inspired in the concept of extendible options, introduced by Longstaff (1990). Unlike existing models, our model allows for: costly restructuring, modification of the face value of debt, and multiple renegotiations. We also study the optimal reorganization policy when there is only one debt restructuring with fixed cost.