The purpose of this thesis is to apply real options method for the valuation of venture company and to relate real options method to the company strategy. Venture companies are characterized by uncertainty in a word. But conventional valuation and budgeting techniques which are unable to capture or quantify the value attached to the uncertainty that surrounds high growth industries show their limitations when one applies them to investments requiring substantial commitment under conditions of significant uncertainty.
Real options method is a logic for investment projects that maximizes learning and access to upside opportunities while containing costs and downside risk. A major advantage of real option methods is that it integrates both financial and strategic considerations.
This thesis is a case study for the valuation of venture company using real options method. The models applied to the case are Black-Sholes model, Luehrman model and Binomial lattice model. I mostly focused on binomial lattice model. I also used traditional valuation methods such as DCF and multiples. The result shows that real options method gives more value to the company compared to DCF method. It means that real options method capture the benefits of manger's flexibility and future opportunity under uncertainty. The ability of real options method that quantifies flexibility in strategic investment projects makes it very appealing choice.
