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A valuation model for firms with stochastic earnings

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  • Steven Li

Abstract

A model is proposed to value a firm with stochastic earnings. It is assumed that the earnings of the firm follow a time-varying mean reverting stochastic process. It is shown that the value of the firm satisfies a boundary value problem of a second-order partial differential equation, which can be solved numerically. Some special cases are discussed. An analytic solution is found for one special case. Moreover, it is shown that the analytic solution is consistent with a previous result obtained by other researchers. Numerical solutions are obtained for the other special cases. Finally, the model is also applied to value the debt issued by the firm.

Suggested Citation

  • Steven Li, 2003. "A valuation model for firms with stochastic earnings," Applied Mathematical Finance, Taylor & Francis Journals, vol. 10(3), pages 229-243.
    • Handle: RePEc:taf:apmtfi:v:10:y:2003:i:3:p:229-243
    DOI: 10.1080/1350486032000148311
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    References listed on IDEAS

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    Cited by:

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    2. Jamie Alcock & Thomas Mollee & James Wood, 2011. "Volatile earnings growth, the price of earnings and the Value premium," Quantitative Finance, Taylor & Francis Journals, vol. 11(6), pages 805-815.
    3. Keith Anderson & Tomasz Zastawniak, 2017. "Glamour, value and anchoring on the changing /," The European Journal of Finance, Taylor & Francis Journals, vol. 23(5), pages 375-406, April.

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