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by t_mann
2476 days ago
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In technical terms, the correct formula to use is E(max(CF,0)), not max(E(CF),0). In the words of the Merton model, equity in a limited liability company behaves like a call option on its assets/cash flow. In reality, these may follow a far more complex process than a geometric Brownian motion with drift as in the Merton model, but that only changes how you compute the expectation in the formula, not the formula itself. |
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