Does Black Scholes Overvalue Early Stage Company Allocations?
Analytics
January 15, 2010 Posted by: James Walling, CFA
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January 15, 2010 Posted by: James Walling, CFAValuation practitioners have adopted the Black Scholes Merton option pricing model (“BSOPM”) as a method for allocating the value of a firm amongst the various securities within a firm’s capital structure. This adoption has been promoted both by its acceptance — even as a preferred method — by the auditing community, and by its inclusion in the AICPA practice guide as an example of an acceptable method for allocating value. However, a growing group of practitioners and auditors are acknowledging the model’s weaknesses and indentifying a number of cases when its use is not appropriate.
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Valuation practitioners have adopted the Black Scholes Merton option pricing model (“BSOPM”) as a method for allocating the value of a firm amongst the various securities within a firm’s capital structure. This adoption has been promoted both by its acceptance — even as a preferred method — by the auditing community, and by its inclusion in the AICPA practice guide as an example of an acceptable method for allocating value. However, a growing group of practitioners and auditors are acknowledging the model’s weaknesses and indentifying a number of cases when its use is not appropriate.
Download the article (PDF)