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Complete discounted cash flow valuation. (English) Zbl 1416.91395

Summary: This paper concerns discounted cash flow valuation of a company. When the company is in trouble, the owners have an option to provide it with a new capital; otherwise it is liquidated. In the absence of capital outflows and inflows, the company’s own funds are modelled by a spectrally negative Lévy process. Within this framework, we look for a strategy of dividend payments and capital injections which maximizes the firm’s value. We provide an optimal strategy as well as the corresponding valuation formula. Illustrative examples are given.

MSC:

91G50 Corporate finance (dividends, real options, etc.)
60G51 Processes with independent increments; Lévy processes
93E20 Optimal stochastic control
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