Corporate valuations and the Merton model
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- 1 January 2007
- journal article
- research article
- Published by Taylor & Francis in Applied Financial Economics Letters
- Vol. 3 (1) , 47-50
Abstract
In recent years both practitioners and academics have realized that traditional discounted cash flow models erroneously consider the option value embedded in firms. Hence equity and debt valuation methodologies based on option theory have recently become quite popular. Such methodologies take inspiration from the Merton ( 1974 Merton, R . 1974. On the pricing of corporate debt: the risk structure of interest rates. Journal of Finance, 29: 449–70. [Crossref], [Web of Science ®] [Google Scholar] ) model which was originally introduced to measure the impact of default risk on corporate bonds yields. Thirty years later the Merton model for its simplicity and rigour remains unrivalled and is the basis of some of the most sophisticated credit risk models. In this paper it will be shown how practitioners often improperly adapt the Merton model for aims beyond its original scope.Keywords
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This publication has 3 references indexed in Scilit:
- Equity and debt valuation with default risk: a discrete structural modelApplied Financial Economics, 2005
- On the Pricing of Corporate Debt: The Risk Structure of Interest RatesThe Journal of Finance, 1974
- The Pricing of Options and Corporate LiabilitiesJournal of Political Economy, 1973