Real Options Valuation: A Case Study of an E‐commerce Company |
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| Authors: | Rocío Sáenz‐Diez Ricardo Gimeno Carlos De Abajo |
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| Affiliation: | 1. Professor of Corporate Finance and Mergers and Acquisitions at Universidad Pontificia Comillas.;2. The authors would especially like to thank professors Margarita Prat of Universidad Pontificia Comillas de Madrid;3. Pablo Fernández of IESE Business School, Gabriel de la Fuente of Universidad de Valladolid and Juan Manuel López Zafra and Enrique García Pérez of Universidad Complutense de Madrid for their invaluable comments. In addition, they would like to thank Lenos Trigeorgis and the rest of the organisers of the 9th Annual International Conference on Real Options, When Theory Meets Practice, where this work was presented. The authors are responsible for any mistakes or ambiguities remaining in the paper.;4. Economist at the Research Department of Banco de Espa?a, (Spanish Central Bank).;5. Managing Director of Morgan Stanley in the firm's investment bank, with considerable experience in both M&A and capital markets transactions. |
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| Abstract: | This paper presents a real options valuation model with original solutions to some issues that arise frequently when trying to apply these models to real‐life situations. The authors build on existing models by introducing an innovative and intuitive risk neutral adjustment that allows us to work with all the simulated paths. The problem of incorporating real options into each path is solved with a “nearest neighbors” technique, and uncertainty is simulated using a beta distribution that adapts better to company‐specific information. The model is then applied to a real life e‐commerce company to produce the following insights: the expanded present value is higher than the traditional present value; the presence of several real options make them interact so that their values are nonadditive; and part of the expanded present value is explained by the presence of “Jensen's inequality” that stems from the “convexity” between the value of each year's cash flow and the uncertain variables. |
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