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Risk adjustment, investment policy, and valuation for an unlevered firm

Author

Listed:
  • Angelica Gianfreda
  • Alessandro Sbuelz

    (Corresponding author, Dipartimento di Scienze economiche (Università di Verona))

Abstract

We characterize the optimal investment decision and the stock value of an unlevered firm that holds the non-standard option of improving the growth rate of cashflows from its assets in place upon incurring an irreversible cost. The firm's investment policy and equity price are studied as a function of the market price of risk, of cashflow's exposure to systematic risk, and of cashflow volatility.

Suggested Citation

  • Angelica Gianfreda & Alessandro Sbuelz, 2008. "Risk adjustment, investment policy, and valuation for an unlevered firm," Working Papers 49/2008, University of Verona, Department of Economics.
    • Handle: RePEc:ver:wpaper:49/2008
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    File URL: http://dse.univr.it/RePEc/ver/Wpaper/WP49.pdf
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    References listed on IDEAS

    as
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    3. Pindyck, Robert S, 1988. "Irreversible Investment, Capacity Choice, and the Value of the Firm," American Economic Review, American Economic Association, vol. 78(5), pages 969-985, December.
    4. Robert McDonald & Daniel Siegel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 101(4), pages 707-727.
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    6. Sarkar, Sudipto, 2000. "On the investment-uncertainty relationship in a real options model," Journal of Economic Dynamics and Control, Elsevier, vol. 24(2), pages 219-225, February.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Investment; Equity pricing; Market price of risk.;
    All these keywords.

    JEL classification:

    • C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling
    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment

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