Contents
- Index
Introduction
©2009 OS Financial Trading System
In this project we will learn how to apply the FTS Real Time Client's analatical support system to value a stock where the "going concern" assumption is not appropriate. That is, a distressed firm that has some lilloiehood that the creditors will wind up the firm to satisfy payment from the firm's assets. The valuation model we will apply is an option pricing based model because the equity of a distressed firm is better viewed as an option. That is, it is an option defined on the total assets of the firm with a strike price equal to the face value of the firm's debt. This formulation recognizes that the debt holders have first claim upon the underlying assets.
The project is organized as follows. We will apply Merton's distressed firm valuation model to value GM stock just prior to it's going into receivership.