Pricing the equity of a firm using extendible options

• Autores: María Isabel Abínzano Guillén, Javier F. Navas
• Localización: Revista de economía financiera, ISSN 1697-9761, Nº. 15, 2008, págs. 22-48
• Idioma: inglés
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• Resumen

  • When a company is in financial distress, debt restructuring is one possible course of action. In this paper we propose a model for pricing equity when the firm can carry on a reorganization of its capital structure. The valuation formulae we obtain are inspired in the concept of extendible options, introduced by Longstaff (1990). Unlike existing models, our model allows for: costly restructuring, modification of the face value of debt, and multiple renegotiations. We also study the optimal reorganization policy when there is only one debt restructuring with fixed cost.