In this article, we explore the use of Black-Scholes Option Pricing Model to price equity firms when they fulfil the below criteria:

1. Firms in Distress These are firms with high leverage, poor earnings, and on the brink of liquidation.  The call option value calculated can be used as the liquidation value of the firm.
2. Natural Resources Firms The call option value represents the value of the option on the undeveloped resources.
3. Firms with Patents Used mostly for start up firms, or high growth firms which derive a large part of their value from their rights to a product or service.

We will explore how we can use BSM with an example for each of the 3 firms. Firms in Distress Suppose you have a troubled firm that you’re interested to purchase.  The firm currently have negative earnings, but after discounting the FCFF to present value, you find the firm ......