An option pricing model under future revenue uncertainty

Abstract

The purpose of this paper is to discuss how the value of high-tech firm can be rationally valued by taking into account managerial flexibility when its future revenue is uncertain, thereby the firm’s manager can make rational investment decisions. Using stochastic control theory, the paper will present that the firm’s value satisfies a partially differentiate equation, and analyze the managerial flexibility value within a framework of real-option analytic theorey. Finally, the comparative static analysis and the model’s simple application are given.