OPTION WORKSHEET: EQUITY AS AN OPTION

VALUING EQUITY AS AN OPTION

This program calculates the value of equity as a call option

on the value of the underlying firm.

Assumptions

1. All the assumptions underlying the Black-Scholes model apply

2. The value of the firm is known.

The user has to input the following variables

1. Current value of the underlying firm (or its assets).

2. Variance in the ln(value) of the underlying firm.

3. Face Value of the outstanding debt.

4. Riskless interest rate that corresponds to average duration of debt.

5. Face-value weighted duration of the debt outstanding of the firm.

6. Expected dividend yield on the stock of the firm.

Inputs relating the underlying asset

 OPTION WORKSHEET: EQUITY AS AN OPTION

Enter the value of the firm = $1,200.00 (in currency)

 OPTION WORKSHEET: EQUITY AS AN OPTION

There are two ways of estimating standard deviation. One is to use the firm's own stock and bond prices to estimate it. The other is to use the varia

Which approach would you like to use to estimate variance? I

If you entered F in cell F22, then enter the following numbers

Are the stocks and bonds of this firm traded? Yes

Enter the standard deviation in the firm's stock price (ln) = 25%

Enter the standard deviation in the firm's bond price (ln) = 10%

Enter the correlation between the stock and bond prices = 0.3

Enter the average D/(D+E) ratio during the variance estimation per 90%

Based upon these inputs, the standard deviation i 10.04%

If you entered I in cell F22, you can look up the standard deviation in firm value below or input your own number

Pick the sector that your company is in Cable TV

Industry average standard deviation for sector 28.13%

If you entered D in cell F22, enter the standard deviation in firm value directly into the cell below.

Indusry average standard deviation to use in model = 25.00%

 OPTION WORKSHEET: EQUITY AS AN OPTION

Enter the current annualized dividends on the stock (total) $0.00 (in currency)

This will result in a dividend yield of 0.00%

Do you want to change this dividend yield for the life of the option No (Yes or No)

If yes, enter the new dividend yield for the life of the option = (in %)

Inputs relating to the option

Enter the cumulated face value of outstanding de $1,844.50 (in currency) [Add coupons to the face value of debt]

Enter the average duration of outstanding debt = 3.9417 (in years)

(Weighted by the face value of the debt)

General Inputs
 OPTION WORKSHEET: EQUITY AS AN OPTION

Enter the riskless rate that corresponds to the option lifetime = 8.00% (in %)

Output

Stock Price= $1,200.00 T.Bond rate= 8.00%

Strike Price= $1,844.50 Variance= 0.079119

Expiration (in years) = 3.9417 Annualized dividend yield= 0.00%

d1 = 0.0741012229

N(d1) = 0.5295350789

d2 = -0.4843473483

N(d2) = 0.3140696892

Value of equity as a call = $212.82

Value of outstanding debt = $987.18

 OPTION WORKSHEET: EQUITY AS AN OPTION

Appropriate interest rate for debt = 17.19%

Risk neutral probability of default = 68.59%

 OPTION WORKSHEET: EQUITY AS AN OPTION

he other is to use the variance of the industry to which your firm belongs.
Industry Name Number of FirmsStd Deviation in Equit Std Deviation in Firm Value
Advertising 32 97.40% 75.44%
Aerospace/Defense 66 44.98% 37.56%
Air Transport 36 64.94% 46.40%
Apparel 54 74.88% 67.70%
Auto Parts 54 57.43% 48.59%
Automotive 12 59.23% 36.66%
Bank 416 50.34% 29.39%
Bank (Midwest) 68 36.37% 27.02%
Beverage 35 47.17% 40.40%
Biotechnology 214 79.99% 71.31%
Building Materials 43 79.76% 55.65%
Cable TV 20 40.45% 28.13%
Chemical (Basic) 18 39.24% 33.12%
Chemical (Diversified 33 49.02% 43.48%
Chemical (Specialty) 70 62.90% 54.45%
Coal 20 56.54% 38.99%
Computer Software 191 68.39% 65.05%
Computers/Peripheral 81 81.83% 76.08%
Diversified Co. 113 60.46% 40.23%
Drug 223 80.68% 72.45%
E-Commerce 64 80.60% 76.55%
Educational Services 33 83.08% 70.13%
Electric Util. (Central) 20 17.29% 11.28%
Electric Utility (East) 17 13.21% 9.13%
Electric Utility (West) 15 14.19% 9.36%
Electrical Equipment 64 67.79% 61.91%
Electronics 123 74.24% 63.52%
Engineering & Const 30 46.03% 41.77%
Entertainment 76 70.99% 56.96%
Entertainment Tech 42 53.25% 48.88%
Environmental 84 79.24% 60.72%
Financial Svcs. (Div.) 256 55.15% 28.57%
Food Processing 119 52.26% 44.44%
Foreign Electronics 10 31.24% 23.64%
Funeral Services 6 26.75% 19.90%
Funeral Services 6 29.77% 19.69%
Furn/Home Furnishing 32 55.60% 47.69%
Healthcare Informati 20 44.41% 40.74%
Heavy Truck & Equip 23 55.26% 41.52%
Homebuilding 22 66.75% 49.65%
Hotel/Gaming 57 55.66% 42.32%
Household Products 27 50.86% 44.71%
Human Resources 25 51.64% 47.64%
Industrial Services 136 57.24% 45.29%
Information Services 28 48.75% 40.29%
Insurance (Life) 32 42.20% 30.55%
Insurance (Prop/Cas.) 62 28.57% 24.59%
Internet 194 97.81% 96.06%
Investment Companie 31 24.10% 22.76%
IT Services 63 56.11% 53.69%
Machinery 94 45.07% 39.80%
Maritime 51 62.52% 33.35%
Med Supp Invasive 87 55.49% 49.28%
Med Supp Non-Invasi 143 67.73% 61.60%
Medical Services 118 74.16% 55.00%
Metal Fabricating 25 60.59% 51.50%
Metals & Mining (Div. 77 93.05% 83.22%
Natural Gas (Div.) 31 44.57% 34.48%
Natural Gas Utility 27 28.44% 19.77%
Newspaper 14 54.39% 42.45%
Office Equip/Supplies 22 51.92% 35.33%
Oil/Gas Distribution 12 35.63% 26.06%
Oilfield Svcs/Equip. 81 59.58% 49.44%
Packaging & Containe 27 36.52% 26.41%
Paper/Forest Products 32 52.28% 40.08%
Petroleum (Integrated 26 47.25% 40.93%
Petroleum (Producing 176 71.26% 59.00%
Pharmacy Services 18 42.23% 36.94%
Pipeline MLPs 53 24.88% 18.95%
Power 101 84.63% 46.34%
Precious Metals 83 77.77% 70.37%
Precision Instrument 82 60.11% 51.82%
Property Managemen 31 50.63% 30.62%
Public/Private Equity 12 42.00% 34.66%
Publishing 29 65.72% 52.12%
R.E.I.T. 127 34.76% 27.44%
Railroad 12 35.73% 30.39%
Recreation 51 52.30% 41.14%
Reinsurance 11 20.74% 18.14%
Restaurant 65 50.92% 46.24%
Retail (Hardlines) 79 63.49% 53.20%
Retail (Softlines) 42 42.54% 40.74%
Retail Automotive 19 64.20% 48.90%
Retail Building Supply 10 31.82% 29.17%
Retail Store 38 63.15% 53.04%
Retail/Wholesale Foo 30 29.93% 23.89%
Securities Brokerage 27 40.56% 19.83%
Semiconductor 142 53.65% 49.76%
Semiconductor Equip 10 40.44% 35.80%
Shoe 17 47.32% 46.60%
Steel 33 45.66% 33.01%
Telecom. Equipment 105 64.86% 58.83%
Telecom. Services 76 64.04% 51.95%
Telecom. Utility 23 43.85% 26.81%
Thrift 170 41.73% 36.35%
Tobacco 11 36.44% 31.88%
Toiletries/Cosmetics 14 40.10% 34.70%
Trucking 34 48.32% 37.16%
Water Utility 11 37.24% 25.24%
Wireless Networking 58 62.91% 52.82%
Total Market 6870 64.10% 45.81%
Variance choices
F Yes
I No
D