Continuity or Liquidation in Situations of Ambiguity: Fuzzy Binomial Model to Valuate Leveraged Firms

Gast¨®n S. Milanesi (), Emilio El Alabi and Gabriela Pesce
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Gast¨®n S. Milanesi: Business Administration Department, Universidad Nacional del Sur., San Andr¨¦s 800, Campus Altos de Palihue, Depto Ciencias de la Administraci¨®n, UNS, Bah¨ªa Blanca (8000), Provincia de Buenos Aires, Argentina
Emilio El Alabi: Business Administration Department, Universidad Nacional del Sur., San Andr¨¦s 800, Campus Altos de Palihue, Depto Ciencias de la Administraci¨®n, UNS, Bah¨ªa Blanca (8000), Provincia de Buenos Aires, Argentina
Gabriela Pesce: Business Administration Department, Universidad Nacional del Sur., San Andr¨¦s 800, Campus Altos de Palihue, Depto Ciencias de la Administraci¨®n, UNS, Bah¨ªa Blanca (8000), Provincia de Buenos Aires, Argentina

Research in Applied Economics, 2015, vol. 7, issue 1, 26-47

Abstract: This paper proposes a fuzzy binomial valuation model to estimate leveraged firm value while conditioning its continuity or liquidation in cash flow generation after taxes to attend debt payments. It includes two triangular fuzzy variables. Thus, we incorporate ambiguity in the firm valuation process characterized by uncertainty in projections of both growth and financial costs. Our proposed model is presented, developed, and exemplified through a case which results complement both the DCF (under the adjusted present value) and the traditional real option binomial method. This occurs because, in one hand, DCF method assumes decisions¡¯ irreversibility and operating firms¡¯ situation. On the other hand, traditional binomial model weakens previous restrictions but does not incorporate ambiguous variables in the analysis. Hence, fuzzy logic applied to option models allows us to complement probabilistic valuation approach working on a frame of possibilities.

Keywords: firm valuation; fuzzy sets; binomial model; uncertainty; adjust present value; debt effects (search for similar items in EconPapers)
Date: 2015
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