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The Applied Research on Option-pricing Theory in Valuation

Author: PanGaoFeng
Tutor: DaiLiang
School: Guizhou College of Finance and Economics
Course: Finance
Keywords: Options Option-pricing theory Valuation GME Application research
CLC: F224
Type: Master's thesis
Year: 2011
Downloads: 144
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Abstract

The 21st century is an era of knowledge economy。From the practice, we discovered that the high-speed development of modern economy is derived by the venture enterprise with innovation colors and high-tech connotation. With good macroeconomic operation, china gradually pays attention to the development of the venture enterprise.For investors and other related people, people focus on the company’s performance, but also pay more attention to the value of enterprises, when they make investment decisions which is the fusion of many factors inside or outside of company. It is an extremely important segment for investor making investment decision to accurately and timely assess the value of company. Therefore, value evaluation not only is a crucial step in investing, but also is key to corporate investment.The traditional value evaluation methods are mainly indirect valuation method and direct valuation method, however, there are differences between the venture enterprise and the traditional enterprise, which mainly for the high growth and the high science and technology innovation of small and medium-sized enterprises. The traditional enterprise value appraisal method ignore that uncertain enterprises have potential opportunity value. Therefore, it can not reflect fully the value of a company, which is easy to cause the managers and investors’ decision-making error.Basing on the value appraisal method above, the option pricing theory provide a new idea for enterprise’s value appraisal since 1970s. especially in the introduction of options thought. To a certain extent, Option pricing law can remedy traditional enterprise value appraisal method, which can reflect objectively the enterprise value.This research is to discuss how to use option pricing method and take the venture enterprise for example. We consider our country specific financial market conditions and some constraints and solve the evaluation problem of uncertainty enterprise. Exploring new ways and ideas for the value evolution of the venture enterprise, this makes sense for GME stable development.In this paper, first, some basic options pricing method is briefly introduced and summarized, the option pricing method application fields and advantage is point out, especially in flexible cases. Second, this part introduces the current value evaluation method, make comparison and analysis, and it is concluded that their respective general condition, advantages and disadvantages. For the option pricing method, it in some special cases more advantages. Third, according to the actual situation of gem in our country, we analyze the possibility and necessity of the option pricing method applied in gem listing enterprise. That is, after point out the defect and disadvantages of the traditional methods, we analyze the advantages of the option pricing method applied in gem listing enterprise, compared with traditional method, especially with uncertainty larger business. Meanwhile, we build the general framework including principles, steps and principles of he option pricing method applied in our country gem listing enterprise. Finally, take a gem listing enterprise as an example, and have empirical analysis. Some conclusions: for some business enterprise speaking, especially its R&D projects, it have great uncertain. If we adopt the value of DCF model method, or other valuation method (such as relative value evaluation method) to evaluation, it is unfeasible. Even if it is feasible, only take this kind, neglecting the project contains option value, thus this lead to the value is serious underestimated. Based on the value evaluation method of options in certain situations playing an important role, especially highly uncertain situation, it does not exclude the traditional value evaluation method, such as cash flow method. They have their respective applicable scope. Sometimes they are combined, which is complementing each other’s advantages. only in this way can we evaluate accurately and make correct Investment decisions.Option-pricing method provides a new systematic way of thinking and perspectives for the gem listing enterprise value assessment under uncertainty cases. Both enterprise policymakers and investors have important practical reference value.

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