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On the Valuation of Companies with Growth Opportunities

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Abstract

Each company faces day to day investment opportunities. Just by staying in business the company is taking a decision of reinvesting capital. These opportunities have to be fairly valued to overcome misallocation of resources. A project with high growth opportunities requires high reinvestments to take full advantage of them until it reaches its mature stage. These investments can be seen as a succession of call options on future growth. When a company with such prospects is valued using the discounted cash flow technique and growth is taken implicitly in the growing cash flows and the residual value, the value thus obtained will be higher than the true one (under certain circumstances). Technology advances and the effects of globalization create enormous growth opportunities, and so misvaluation risks are higher.

Suggested Citation

  • José Pablo Dapena Fernandez, 2003. "On the Valuation of Companies with Growth Opportunities," Journal of Applied Economics, Universidad del CEMA, vol. 6, pages 49-72, May.
    • Handle: RePEc:cem:jaecon:v:6:y:2003:n:1:p:49-72
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    File URL: https://ucema.edu.ar/publicaciones/download/volume6/dapena.pdf
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    References listed on IDEAS

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    Cited by:

    1. Samaniego Alcántar Ángel, 2010. "Incertidumbre en los proyectos de investigación y desarrollo (I+D). Un estudio de la literatura," Contaduría y Administración, Accounting and Management, vol. 55(3), pages 65-81, septiembr.

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    More about this item

    Keywords

    real options; valuation; contingent claims valuation;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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