Financing Sources for a Firm: An Approach Based on Option Theory (Le Fonti Di Finanziamento Dell'Impresa Alla Luce Della Teoria Delle Opzioni)

ENI Scuola Superiore "E. Mattei" Studi, Ricerche & Documenti Series (1994-2001)

47 Pages Posted: 2 Sep 2008 Last revised: 15 Oct 2008

See all articles by Alessandro Mauro

Alessandro Mauro

MKS; University of Geneva - Geneva School of Economics and Management

Date Written: October 1, 1998

Abstract

A limited liability company, when carrying debt, can choose to repay or not the debt according to pure economic calculations. This simple idea is fruitful if nested in modern option theory. In this way we can better understand the position of the main company stakeholders, that is shareholders and creditors, and give an alternative evaluation of their rights and the company as a whole. The study of this approach to the financing sources of the enterprise is the subject of this paper.

In the first part we clarify what is an option contract, underlying some of its fundamental features. This let us develop the initial view, till the introduction of a new vision of equity and debt.

In the second part of the paper we explain how to value an option, introducing some important findings. We discuss of some problems and obstacles to be addressed in order to use option theory in this field.

In the third and last part, we give more realism to the theoretical approach. This further step let us analyze complex financial structures, such as debts with different expiries, different reimbursement priorities, or guaranteed debt.

Note: Downloadable document is in Italian.

Keywords: Options, Call Options, Put Options, Financing Sources, Black-Scholes, Enterprice Value, Guaranteed Debt, Compound Option

JEL Classification: G30, G12

Suggested Citation

Mauro, Alessandro, Financing Sources for a Firm: An Approach Based on Option Theory (Le Fonti Di Finanziamento Dell'Impresa Alla Luce Della Teoria Delle Opzioni) (October 1, 1998). ENI Scuola Superiore "E. Mattei" Studi, Ricerche & Documenti Series (1994-2001), Available at SSRN: https://ssrn.com/abstract=1023161 or http://dx.doi.org/10.2139/ssrn.1023161

University of Geneva - Geneva School of Economics and Management ( email )

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