Valuation Techniques: Discounted Cash Flow, Earnings Quality, Measures of Value Added, and Real Options

CHAPTER 22

REAL OPTIONS AND INVESTMENT VALUATIONa

Don M. Chance, CFA, and Pamela P. Peterson, CFA

Making an accurate company valuation is the cornerstone of making a sound investment decision. But one factor that is often overlooked (and sometimes even overvalued) is the real options that a company may have. In this chapter, the authors explore real-options valuation—looking at these models vis-à-vis traditional valuation models, providing examples and simple case studies, and examining the criticisms and limitations of real-options valuation.