An Option Pricing Approach to Asset Sale
Heriot-Watt University Working Paper No. 2000/1
20 Pages Posted: 22 Aug 2000
Date Written: July 2000
Abstract
This paper presents a model of asset sale under uncertainty and derives an optimal scrapping rule. It shows that under certain conditions an asset should be scrapped when its operating profit first reaches a critical level. A testable equation based on the model is suggested. The model may be applied to voluntary liquidations, plant closures, sell-off, spin-off and the examination of takeover premiums.
Keywords: Asset Sale, Capital Budgeting, Real Options, Scrapping
JEL Classification: G31, M40, M46
Suggested Citation: Suggested Citation
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