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Because of limited liability shareholder can walk way from company when debt exceed value of share but if value of share exceed value of debt then shareholder will continu to run the business to collect the surplus
Therefore value of share can be seen as a call option
My question here is that i don’t see the logic why should i see value of share as a call option???
why can’t i see it as put option???
Suppose the value of the assets was 2,000 and the debt owing was 1,500.
Then ignoring the time to repayment of debt, the interest rate, and the volatility, the value of the equity would be 2,000 – 1,500 = 500.
In the formula for the value of a call option, Pa will be 2,000 and Pe will be 1,500 and the basic forum is taking Pa – Pe (the other terms in the formula are simply taking into account the volatility of the assets value, the time until the debt is repaid, and the interest rate, as I explain in my free lectures.)
Sir so here Pa is the fair value of assets and Pe= book value or MV of debt?
Is it that if we take Fair vlaue(i.e. the MV) of TOTAL ASSETS(NON CURRENT AND CURRENT ASSETS) then we need to take fair value of TOTAL NON CURRENT and CURRENT LIABILITIES
and if we are taking the book value of TOTAL ASSETS(NON CURRENT AND CURRENT ASSETS) then we will take book value of TOTAL NON CURRENT and CURRENT LIABILITIES
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