A binomial lattice approach for valuing a mining property IPO

Research output: Contribution to journalShort surveyResearchpeer-review

21 Citations (Scopus)

Abstract

The last decade has witnessed an emerging literature that applies option pricing methods to evaluate claims on real assets. Previous research has applied option pricing to the optimal investment timing decision for the firm. This paper applies a binomial lattice approach to the valuation of a gold mine at the time of its initial public offering. The paper has two goals: (1) to demonstrate how to derive the value of the investment timing option using publicly available information contained in a prospectus, and (2) to relate the value derived from the option model to the final offer price of the IPO. The option value derived approximates the trading value of shares at the date of valuation. The sensitivity analysis presented allows us to explore the sensitivity of the option values to changes in the model's parameters. The paper provides insight into the suitability of this method as an alternative to discounted cash flow valuation techniques for valuing IPO's.

Original languageEnglish
Pages (from-to)693-709
Number of pages17
JournalQuarterly Review of Economics and Finance
Volume38
Issue number3 Part.1
DOIs
Publication statusPublished - 1 Dec 1998
Externally publishedYes

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Option value
Option pricing
Investment timing
Initial public offerings
Discounted cash flow
Optimal investment
Sensitivity analysis
Assets

Cite this

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A binomial lattice approach for valuing a mining property IPO. / Kelly, Simone.

In: Quarterly Review of Economics and Finance, Vol. 38, No. 3 Part.1, 01.12.1998, p. 693-709.

Research output: Contribution to journalShort surveyResearchpeer-review

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