Pricing the equity of a firm using extendible options

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

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.