The Effect Of Option Pricing Model On The Valuation Of Media Industry

This essay mainly focuses on the valuation of the listed companies onthe media industry by means of real option pricing model. The mediaindustry is a newly developed industry, which will be specially supportedby the government as said in the12th Five-Year Plan. Therefore theresearch on method of valuation of listed companies in the media industrywill also have some inspiration for valuation methods of the emergingindustry.The common valuation methods currently being used either put anemphasis on the return rate of the investment listed companies involved,focusing on quantitative methods such as net present value method as thefundamental basis of the valuation; or be entirely dependent on theindividual’s subjective experience of intuition, that is to assess theenterprise value to earnings, book value and other relative valuationmethod. These two methods, however, both have obvious flaws, and arevery likely to cause deviation of the valuation. Traditional NPV methodmay overlook the operating flexibility value of investment projects andstrategic value, ignoring the investment opportunity of choice. It is a staticand rigid evaluation method, and therefore, in many cases, is not objectivefor the evaluation of a company, resulting in the investors’decision-making errors.The real option is a derivative of option pricing theory from financialmarkets to the application of corporate strategic. In daily process ofinvestment, investors tend to have a variety of options (real options), itallows investors to give full play to the right to choose in order to achieve the purpose of maximizing returns in decision-making. Simply speaking,the real option is the application of the thoughts of option in real lifeinvestment.An important business in the companies of media industry is to shootTV series and movies, which is a high-risk investment activity. Thecompany will not do any market research, or a trial version before theystart shooting. They would not know the outcome of the film until theyfinished. As for the independent film market, the elimination rate is reallyhigh. For a new product without a trial, it is very difficult to have a gooddesign of marketing and advertising strategy. So it is not hard to imaginethe difficulty the company is faced with, so is the risk. When the market isin healthy condition, the company can take an additional investment ofshooting; while in poor market conditions, the company can shrink, evenretract there investment to avoid a greater loss. Therefore the majorbusiness of the companies in media industry shares a similar characteristicwith real-options.This essay first analyzed the newly approved fund-selling service ofthe listed company “Eastmoney” using the binary tree option-pricingmodel. Then implemented the Black-Scholes option-pricing model ontwenty-eight typical listed companies in the media industry.By evaluatingthese enterprises; this essay explored the valuation method for otherhigh-risk industry similar to the media industry. Meanwhile, discussed thedifference between the outcome of option valuation method with thecurrent price of the stock, and analyzed the reasons for the differences.