Firm Valuation under Uncertainty - Risk Factor Modelling in Valuation

Resumen

This paper presents a proposal for business valuation that incorporates business uncertainty conditions inherent to business, which can be represented by continuous-time functions. This approach is yet incipient, although many models are available for research and application in other functions in the discrete field. We incorporate uncertainties external to the company such as prices and resource exhaustion. (ii) Method. We start from Arzac's (2005) proposal – company valuation in continuous time. We include, in the model, business’ external uncertainties, such as resources and market price oscillations. (iii) Discussions. In investment decisions, the investor is usually confronted with a set of uncertainties inherent to the business, such as, for example, the oscillatory behavior of revenue, cost competition, etc. In this scenario, the perspective becomes more complex when the business' revenues depend on commodity prices and, additionally, on its resource exhaustion. We incorporate these circumstances that are not captured in traditional models. (iv) Contributions. We argue that, in the neighborhood of the risks internal to the firm and external to the business, investors’ decisions must be driven by valuation so that they do not become sunk investments. We propose here a theoretical model that can contribute, in this scenario, to the operators and beneficiaries of the decision-making processes of firm valuation under conditions of uncertainty.