Valuing Corporate Growth Using Real Options

Abstract

Corporate DCF model has been often criticized for limitations in valuing investments with significant multi-period growth opportunities. Current paper offers practical methodology that employs recombining binomial trees and real option techniques for valuing companies pursuing organic growth strategy in case of demand uncertainty. Specially constructed recombining tree is adapted to valuations of multiple American type compound growth options. Computational complexity is considerably reduced that makes these solutions feasible to implement in business practice and empirical testing.