On the Valuation of Companies with Growth Opportunities

Each company faces day to day investment opportunities. Just by staying in business the company is taking a decision of reinvesting capital. These opportunities have to be fairly valued to overcome misallocation of resources. A project with high growth opportunities requires high reinvestments to take full advantage of them until it reaches its mature stage. These investments can be seen as a succession of call options on future growth. When a company with such prospects is valued using the discounted cash flow technique and growth is taken implicitly in the growing cash flows and the residual value, the value thus obtained will be higher than the true one (under certain circumstances). Technology advances and the effects of globalization create enormous growth opportunities, and so misvaluation risks are higher.


Issue Date:
2003-05
Publication Type:
Journal Article
DOI and Other Identifiers:
Print ISSN 1514-0326 (Other)
Online ISSN 1667-6726 (Other)
Record Identifier:
http://ageconsearch.umn.edu/record/44040
PURL Identifier:
http://purl.umn.edu/44040
Published in:
Journal of Applied Economics, Volume 06, Number 1
Page range:
49-72
Total Pages:
24
JEL Codes:
G12




 Record created 2017-04-01, last modified 2018-01-22

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