By Michael Genser
This booklet is the 1st finished remedy of structural credits danger versions for the simultaneous and constant pricing of company securities. throughout the improvement of a versatile financial framework in line with the firm’s EBIT, the reader is taken from the commercial rules of multinational price versions to the empirical implementation. Analytical recommendations are supplied if EBIT follows an mathematics or geometric Brownian movement. moreover, numerical equipment are proposed to unravel extra complex monetary settings or to cost derivatives on company securities. Numerical examples make the speculation simply available and convey its skill to breed empirical observations. An econometric implementation publications in the direction of useful program. as a result, the e-book offers a cutting-edge exposition of company securities pricing for teachers and practitioners alike.
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Additional info for A Structural Framework for the Pricing of Corporate Securities: Economic and Empirical Issues
Goldstein et al. (2001), Christensen et al. (2000), and Flor and Lester (2004) develop models where equity owners issue one single ﬁnite maturity or perpetual debt contract with a call feature. The call feature is the crucial diﬀerence to our setting here. If the ﬁrm is successful and EBIT increases, it might be proﬁtable for equity owners to call the existing debt before its maturity and relever the ﬁrm to better exploit the tax advantage to debt. 29 To incorporate optimal calling features some adjustments to the current framework are necessary.
If such a relationship is neglected, equity owners are allowed to sell all physical assets to generate an extra cash ﬂow of It0 immediately but still receive all future EBIT-payments ηt , t > t0 . As an alternative to changing µ(·) and ση (·) endogenously, an immediate asset sale can be prevented by deﬁning a maximum return on investments ROImax . Any EBIT that exceeds ηmax,t = ROImax · It would be forgone if the ﬁrm does not invest to enlarge operations. In contrast, if EBIT falls and the level of assets becomes unreasonably high compared to the value of expected future cash ﬂows, equity owners have an incentive to disinvest because reaching the upper EBITbarrier is unlikely.
However, some comments on the treatment of reﬁnancing strategies which were made with reference to the structural ﬁrm value literature and the model of the bankruptcy event seem warranted. 1 Flexible Reﬁnancing Policies In recent years some authors31 have suggested indirect approaches to reﬁnancing strategies. Instead of modeling debt issues explicitly, a distance to default process is deﬁned which is mean reverting and inﬂuenced by the current market condition or interest rate level. e. bankruptcy occurs if the distance to default is zero.
A Structural Framework for the Pricing of Corporate Securities: Economic and Empirical Issues by Michael Genser