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Valuation of Capital Structure using Simulation Techniques

by Yevgeny Goncharov Florida State University, and
Yaacov Kopeliovich of MEAG New York

August 1, 2006

Abstract: We propose a simulation based technique for security valuation in an arbitrary capital structure. Extending Merton [M] and Leland [L] we model securities in capital structure as derivatives on the asset value of the company and we treat all payments made to these securities as a stochastic dividend process. Different seniority coupon paying bonds, warrants, and convertible bonds are modeled as part of the capital structure. Dilution effects on warrants and convertible bonds value are considered. We use Monte Carlo with regression that gives flexibility and simplicity in the implementation of different stochastic processes.

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