Development of the Valuation Models that is Suitable for Each Type of New Businesses with Real Option Approach

2003 Fiscal Year Final Research Report Summary

• Project/Area Number: 14530136
• Research Category: Grant-in-Aid for Scientific Research (C)
• Allocation Type: Single-year Grants
• Section: 一般
• Research Field: Business administration
• Research Institution: Gunma University
• Principal Investigator: TERAISHI Masahide Gunma University, Gunma University, Faculty of Social and Information Studies, Professor (20217409)
• Project Period (FY): 2002 – 2003
• Keywords: real option / valuation / new business / venture capital / flexibility / cash flow

Research Abstract

Valuation of a new business is much more difficult than an existing business, because value of a new business depends on future investment opportunities and decision-making flexibility more mainly than present value of cash flow. The purpose of this study was valuation of investment opportunities and flexibility, which is difficult by DCF method, with the option pricing models that is valuation technique for financial option.
In the first year, I classed various new businesses in some patterns by differences of time patterns of cash flow, character of a risk, and degree of decision-making flexibility. Furthermore, I extracted models with possibility to contribute to new business valuation from the various option pricing models which had been studied till now.
In the second year (the last year), I investigated valuation technique that venture capital really used, and I analyzed how venture capital grasped real options in new businesses and included them in valuation. Then I designed the most adapted valuation model in each new business type. I calculated value of venture companies or new businesses by applying these valuation models, and examined what kind of factors brought differences between the theoretical value and the stock price formed in the stock market (or the value that a manager thought to be reasonable).