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Pricing the equity of a firm using extendible options
Javier F. Navas and Isabel Abínzano |
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When a company is in financial distress, debt restructuring is one possible course of action. In this paper we propose a model for pricing equity when the firm can Carry out a reorganization of its capital structure. The valuation formulae we obtain are inspired in the concept of extendible options, introduced by Longstaff (1990). Unlike existing models, our model allows for: costly restructuring, modification of the face value of debt, and multiple renegotiations. We also study the optimal reorganization policy when there is only one debt restructuring with fixed cost.
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