The traditional approaches to valuating companies are currently grouped into three categories: the patrimonial method is based on the value of company assets, the multiples method consists of determining a value using similar companies as a reference or transactions that took place in the same sector, and the method of discounted cash flows tries to consider the development potential of the company. These different methods are used by those who think the value obtained by one of them should not be the focus, but rather an approach that seeks to link them. This recommendation is justified given that the practice is not an exact science.

Nevertheless, these different approaches have specific and common limits. Indeed, the multiples method can lead the analyst to false sector-specific multiples when the company reference contains large disparities in terms of financial structure or investment policy. The DCF method depends on hypotheses, which in turn depend on the analyst’s subjectivity. In this way, each one can justify a level of provisional cash flow and weighted mean cost of capital by justifying the pertinence of the established business plan. The patrimonial approach counts on the value of assets in the current portfolio and excludes, as such, any potential for growth.

Otherwise, they have the common disadvantage of considering an accounting net debt rather than an economic net debt¹, and omitting the notion of flexibility with respect to investment decisions. In practice, indeterminate elements can lead a company to account for unforeseen cash flow at the moment of investment. In order to obtain the economic value of personal equity, we subtract the value of net debt from the value of the company. But to be completely methodologically coherent, in each approach, we would have to take the economic value of the net debt into account instead.

Furthermore, these methods do not include the notion of flexibility, which is essential for any investment decision. Indeed, the unforeseen cash flows of model creation can appear while devising an investment plan. In this case, considering the total risk through the volatility of assets is something that would allow us to reach a better value.

Real options give us solutions with respect to this lack of flexibility. They are based on the concept of traditional financial options and by extension, have their utility. Thus, if real options are used for the study and valuation of an investment project (just like an NPV, or Net Present Value), we can suppose that there is a possible extension for the structure of liabilities and shareholders’ equity².

In the case of real options, the implication is a “real” asset that has not been assessed. Because of this, the potential investment of a company can be seen as an entrance fee that allows us to access future opportunities. Thus, the value of a project is not limited to the present value of anticipated cash flow, but must capture all of the opportunities for growth that will present themselves in the future. Real options will then offer the advantage of incorporating the possibility of an increase, as well as a decrease in future cash flows through the parameter of volatility. Indeed, the incertitude is the reflection of the volatility of assets and the prospects of evolution in the project that would result in strategic decisions. The company can, for example, make the choice to abandon its project, follow through with it or extend it… This concept of flexibility is not taken into account in the NPV criteria and, thus, in the DCF method.

From this perspective, since liabilities are the mirror of company assets, its economic value and the value of its debts can also be studied with respect to options. By adopting a logic based on the sale of a company, shareholders, who have a limited responsibility with respect to creditors in a capital company, can recover assets from the company, as long as they pay back the nominal value of the debt. And, as in a capital company, the shareholders have a limited responsibility with regard to creditors, the economic value, which corresponds to their wealth, and is analogous to the value of the purchasing option of assets. In other words, shareholders have a claim over the assets. They can buy them as long as they reimburse the creditors. The optional references (notably Black and Scholes (1973)³ and Merton (1974)⁴) thus propose a new company value taken from the sum of the economic value and the net debt.

The theoretical comparison between traditional methods and the real options method must extend to practical use. Whether a company’s investment plan is more or less risky, and as a consequence, if the asset portfolio – and thus the liabilities structure – is more or less volatile whether the value of the net debt is bigger or smaller and whether its maturity is longer or shorter, the results from different valuation methods could very well vary and become more or less pertinent and reliable within a particular sector. Indeed, by trying to consider the economic value of net debt from an optional perspective, the analyst evaluating the economic value of a company using the Black–Scholes–Merton method could detect a potential for growth, meaning that stock prices are somewhat underestimated. In other words, in this case, the valuation of economic value results in the following estimation:

Since a company’s investment portfolio value, that is, its assets, is equal to the value of its liabilities, to what extent can the approach using real options be applied to the valuation of a company’s liabilities structure?

The first section will focus on the application of real options to the liabilities structure. The limits of traditional valuation methods, which the approach using options is aiming to resolve, will first be presented. Then, the optional valuation models in discrete time and continuous time will be developed, in order to locate their convergence. This theoretical framework will end in a valuation of economic value and debt using an optional approach. The second section will be dedicated to the study of the financial literature, which will specify the aspects and the stakes of economic debt and examine the adjustment of systematic risk in economic value. Then, the scientific articles that have been studied will elucidate the impact of the agency conflicts that exist between shareholders and creditors on the optional approach to the issue. Finally, debt refinancing mechanisms and their impact on economic value will be addressed. A third part will deal with two studies carried out on different dates, including statistical tests of the traditional valuation methods and following the real options approach. The first study concentrates on companies in the CAC 40 index. The second study examines companies in the cinema industry.