Company Valuation Under IFRS : Interpreting and Forecasting ...

Chapter Two – WACC – Forty years on
4. Option model inputs and results (€ million)
Inputs to model:
S = Estimated value of firm's assets 38,981
E = Book value of debt 33,220
S.D. = S.D. of enterprise value 56.8%
T = Weighted average duration of debt (years) 2
r = Risk free rate 4.0%
Theoretical values of equity and debt:
Value of equity 14,538
Value of debt 24,443
Enterprise value 38,981
Market value debt/book value debt (%) 73.6%
Target share price 13.35
5. Black Scholes option valuation model
Basic inputs:
Asset value (S) 38,981
LN annual standard deviation of asset value (S.D.) 56.8%
Exercise price (E) 33,220
Annual periods (T) 2.00
Risk free rate (R) 4.0%
Adjustment for project cash flow:
Enter either: Annual cash flow from project 635
Or enter: Yield from project
Yield for option calculation 1.6%
Model outputs:
Value of call 14,538
Value of put 7,485
Model variables:
Asset value 38,981
Exercise price 33,220
Years to expiry 2.00
Risk free rate 4.0%
Standard deviation 56.8%
Variance (S.D.^2) 32.3%
Yield 1.6%
d1 0.65934
N(d1) 0.74516
d2 -0.14440
N(d2) 0.44259
63