Pricing the equity of a firm using extendible options
- Abínzano Guillén, María Isabel
- F. Navas, Javier
ISSN: 1697-9761
Año de publicación: 2008
Número: 15
Páginas: 22-48
Tipo: Artículo
Otras publicaciones en: Revista de economía financiera
Resumen
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.