The purpose of this paper is to show how contingent claim valuation and, more precisely, structural models, can be used to value the debt and the equity of a corporation. The objective is to provide a general and unified valuation framework.
A discrete version of the Geske model in a binomial‐like environment is implemented. To make the analysis more applied, real data of a corporation – Lucent Technologies, Inc. are used – and the valuation is attempted.
Structural models can be used as a practical valuation tool. The results that are obtained are close to market data. Additionally, the authors are able to determine the price of some non‐traded claims (debt).
While the more direct implication is that structural models can be used as a practical valuation tool, more applied research is needed to better calibrate the models.
To the applied finance literature is contributed by presenting a way of estimating the value of corporate debt and equity by calibrating a discrete version of Geske model. It is believed that this approach is not only interesting from the academic point of view, but can also serve as a useful tool for practitioners.
