Pricing the equity of a firm using extendible options
- Abínzano Guillén, María Isabel
- F. Navas, Javier
ISSN: 1697-9761
Year of publication: 2008
Issue: 15
Pages: 22-48
Type: Article
More publications in: Revista de economía financiera
Abstract
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.