APPLYING OPTIONS PRICING METHOD IN DETERMINING THE WEIGHTED AVERAGE COST OF CAPITAL

Authors

  • Nguyễn Thanh Hồng Ân Faculty of Economics and Business Administration, Dalat University, Viet Nam

DOI:

https://doi.org/10.37569/DalatUniversity.0.0.220(2012)

Keywords:

Định giá quyền chọn, Black-Scholes approach, WACC

Abstract

In calculating the average cost of capital for investment projects, one important factor to be determined is the weights for different sources of fund. According to the traditional method to calculate the weighted average cost of capital (WACC), these weights will be determined basing on the market value of the sources of fund relatively to the market value of the project. However, in the case of lending to companies with limited liability status, the lenders have embedded an option into the lending contracts. The value of this option in not accounted for in the traditional method of calculating WACC, which make the results incorrect. This paper applies the Black – Scholes option pricing method to calculate the value of embedded options in lending contracts. From this, we can recalculate the correct weights for different sources of fund and then, calculating the correct weighted average cost of capital.

Downloads

Download data is not yet available.

Published

30-11-2012

Volume and Issues

Section

Economics and Management

How to Cite

Ân, N. T. H. (2012). APPLYING OPTIONS PRICING METHOD IN DETERMINING THE WEIGHTED AVERAGE COST OF CAPITAL. Dalat University Journal of Science, 58-64. https://doi.org/10.37569/DalatUniversity.0.0.220(2012)