The purpose of this paper is to use fundamental models incorporating structural relationships within the firm in a terminal value model for the second stage of a two-stage valuation model utilized to estimate the value of a company.
The innovation is that growth options are identified within the structural relationships and a model capturing the value of the optionality is incorporated in the second stage of the two-stage valuation model.
Significant outcomes are that terminal value is shown to be a large portion of a company’s total value and the price behavior for initial public offerings produced by the model is consistent with the result of empirical studies.
This paper explicitly incorporates growth options in the second stage of a two-stage valuation model for the firm.
