On the Consistency of a Firm’s Value with a Lognormal Diffusion Process

Andrew M. K. Cheung, Van Son Lai

Department of Finance, Fairleigh Dickinson University, Vancouver, Canada.
Department of Finance, Laval University, Quebec, Canada.

DOI: 10.4236/jmf.2012.21003                

Abstract

A partial equilibrium model is developed to examine conditions supporting the representation of the value of a firm by the lognormal diffusion process. The model formalizes the operating side of the firm and leads to a formula valuing the firm’s risky profit stream. The present value formula is then compared to the existing work on valuing exogenous risky income stream. Implications of the resulted pricing model on the volatility of the firm value processes are explored.

Keywords

Cashflow Valuation; Adjustment Cost; Non-Constant Volatility Process; Lognormal Distribution

Conflicts of Interest

The authors declare no conflicts of interest.

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