Application Of Option Price Model In Industrial Investment Evaluation

Recently, enterprise's capital operation activities such as private equity (PE), initial public offerings (IPO), merge and acquire (M&A) and so on increasingly stirring with capital market development. Such activities play an important role in the rapid development and strength of a firm, but a core problem in capital operation activities of a company is how to evaluate the target establishment.The value of the operation flexibility in the process of the firm development is not taken into account in all kinds of traditional enterprise valuation ways, which is an option that company administrators can adjust investment decisions-making such as delay investment, abandoning investment, switching investment, adding investment, reducing investment, shifting investment with the change of the project life cycle stages to improve the investment revenue and to avoid the investment risk according to the varieties of changes of the enterprise external operational environments. Traditional enterprise evaluation ways can not give an rational price of the value of the enterprise operation flexibility neglected this value in the process of the firm development.Capital operation activities themselves have some optional characteristics as strategic investment behaviors. For example, when in possession of the chance to invest the target companies, these behaviors in the choosing chances may show an -option to postpone the purchase the target firms when investors wait for sometime to observe the target firms and then choose to invest this company, an option to add investment to the target firms when the external environment of the target company is in favor of the investment, an option to give up investment or to sell part of or all the target firms in order to effectively reduce investment loss and decrease investment risks when the external environment of the target company goes against the investment. The value of these options is often neglected in the traditional evaluation ways for the target firms in capital operational activities.Aiming at disadvantages of traditional evaluation ways, this issue will introduce option price model based on describing the overseas and domestic development of enterprise value evaluation, researching the main theories of the enterprise value valuation, construing the problem in traditional evaluation methods, find the potential values of enterprises in use of flexible options and growth options, study an industrial investment case to valuate the target firm using option price model in the practice and point out the problems and significances of option price model application in the actual operation.The idea that this issue apply option price model into enterprise evaluation in capital operation activities is provided with an strategic decision-making meaning for it can more comprehensively, more rationally and more scientifically evaluate the target firms in capital operation activities such as private equity, initial public offerings, merge and acquire and so on in the industrial investments. In the same time, this idea induces a new way to solve the problem for other project investments and a method to help the institutional investors to find the potential value of investment projects. Furthermore, a plenty of mathematic models in this issue can use for the forecast of a company's finance and operation.