Patrick Anderson
- Published in print:
- 2013
- Published Online:
- September 2013
- ISBN:
- 9780804758307
- eISBN:
- 9780804783224
- Item type:
- book
- Publisher:
- Stanford University Press
- DOI:
- 10.11126/stanford/9780804758307.001.0001
- Subject:
- Economics and Finance, Financial Economics
For decades, the traditional approaches to business valuation (market, asset, and income) have taken center stage in the assessment of the firm. This book presents an expanded valuation toolkit, ...
More
For decades, the traditional approaches to business valuation (market, asset, and income) have taken center stage in the assessment of the firm. This book presents an expanded valuation toolkit, consisting of nine well-defined valuation principles hailing from the fields of economics, finance, accounting, taxation, and management. It ultimately argues that the “value functional” approach to business valuation avoids most of the shortcomings of its competitors, and more correctly matches the actual motivations and information held by stakeholders. To remedy the shortcomings of existing theory, the author proposes a new definition of the firm that is consistent with the principle that entrepreneurs maximize value, not profit.Less
For decades, the traditional approaches to business valuation (market, asset, and income) have taken center stage in the assessment of the firm. This book presents an expanded valuation toolkit, consisting of nine well-defined valuation principles hailing from the fields of economics, finance, accounting, taxation, and management. It ultimately argues that the “value functional” approach to business valuation avoids most of the shortcomings of its competitors, and more correctly matches the actual motivations and information held by stakeholders. To remedy the shortcomings of existing theory, the author proposes a new definition of the firm that is consistent with the principle that entrepreneurs maximize value, not profit.
Patrick L. Anderson
- Published in print:
- 2013
- Published Online:
- September 2013
- ISBN:
- 9780804758307
- eISBN:
- 9780804783224
- Item type:
- chapter
- Publisher:
- Stanford University Press
- DOI:
- 10.11126/stanford/9780804758307.003.0012
- Subject:
- Economics and Finance, Financial Economics
This chapter demonstrates the importance of management flexibility regarding the timing, scale, and type of investments, which is the basis for the study of “real options.” The chapter describes an ...
More
This chapter demonstrates the importance of management flexibility regarding the timing, scale, and type of investments, which is the basis for the study of “real options.” The chapter describes an opportunity and its contractual equivalent, an option, the history of option contracts, the classic Black-Scholes-Merton option model of the firm, and the formula for pricing, under ideal conditions, a pure financial call option. From this basis, the author draws the conclusion that the existence of an option premium alone renders invalid the Net Present Value rule for the value of the firm. The author then describes techniques for valuing “real options,” including extensions of financial options methods, Decision Tree Analysis, Monte Carlo, stochastic control, and value functional models, and “good deal” bounds. Finally it describes a recently-proposed synthesis of traditional income methods and real options analysis, which the author calls “expanded net present value” or XNPV.Less
This chapter demonstrates the importance of management flexibility regarding the timing, scale, and type of investments, which is the basis for the study of “real options.” The chapter describes an opportunity and its contractual equivalent, an option, the history of option contracts, the classic Black-Scholes-Merton option model of the firm, and the formula for pricing, under ideal conditions, a pure financial call option. From this basis, the author draws the conclusion that the existence of an option premium alone renders invalid the Net Present Value rule for the value of the firm. The author then describes techniques for valuing “real options,” including extensions of financial options methods, Decision Tree Analysis, Monte Carlo, stochastic control, and value functional models, and “good deal” bounds. Finally it describes a recently-proposed synthesis of traditional income methods and real options analysis, which the author calls “expanded net present value” or XNPV.
Patrick L. Anderson
- Published in print:
- 2013
- Published Online:
- September 2013
- ISBN:
- 9780804758307
- eISBN:
- 9780804783224
- Item type:
- chapter
- Publisher:
- Stanford University Press
- DOI:
- 10.11126/stanford/9780804758307.003.0001
- Subject:
- Economics and Finance, Financial Economics
The author traces the importance of the business, company, or firm in Economics, society, and world history over two millennia. The author notes that, given its importance and centrality in modern ...
More
The author traces the importance of the business, company, or firm in Economics, society, and world history over two millennia. The author notes that, given its importance and centrality in modern economies, there should be a well-developed theory of the firm that pervades both Economics and Finance. However, a series of “quandaries” are posed that illustrate that this is not the case. These include the fact that neoclassical economics essentially ignores the firm, that mainstream Economics largely ignores the entrepreneur, and that real entrepreneurs do not maximize profits. Furthermore, much of Finance focuses on publicly-traded firms, while 99% of firms are privately held, and mathematical finance often assumes complete markets, which are a rarity in the actual world. These provocative statements motivate much of the theory and applications developed in the rest of the book.Less
The author traces the importance of the business, company, or firm in Economics, society, and world history over two millennia. The author notes that, given its importance and centrality in modern economies, there should be a well-developed theory of the firm that pervades both Economics and Finance. However, a series of “quandaries” are posed that illustrate that this is not the case. These include the fact that neoclassical economics essentially ignores the firm, that mainstream Economics largely ignores the entrepreneur, and that real entrepreneurs do not maximize profits. Furthermore, much of Finance focuses on publicly-traded firms, while 99% of firms are privately held, and mathematical finance often assumes complete markets, which are a rarity in the actual world. These provocative statements motivate much of the theory and applications developed in the rest of the book.
