Calculating Real Option Value under Different Approaches in the Tehran Stock Exchange

Abstract

Objective: A question that always arises for some practitioners and academicians is why stock prices in firms are not consistent with traditional discounted cash flow (DCF) models. Method: To this end, firms’ stock market prices should be analyzed on the basis of scientific principles. In addition, real options and their role in firms’ stock market value is an issue that has always been considered implicitly in practice and needs to be studied scientifically. Hence, this paper examines the relationship between a portion of the firm's stock market value that is due to real options and variables that are related to real options. Results:The results of the study, based on data from 140 industrial-productive firms during an 11-year period, indicates that in all three approaches, net income (NI), free cash flow to equity (FCFE) and free cash flow to firm (FCFF), a part of the firm’s stock market value is on average due to real options.

Keywords

• real option
• net income
• free cash flow to equity
• free cash flow to firm