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The Valuation of a Firm Advertising Optimally

D. Epstein, N.Mayor, P.Schonbucher, A.E. Whalley, P. Wilmott


In this paper we model the value of a firm based on its current earnings and cash balances. The value is modelled on the assumption that earnings follow a mean-reverting process. The effect of advertising on earnings is modelled, and the condition for optimal advertising derived. The value of the firm is derived as the solution to a partial differential equation. The way in which this value depends on the legal structure and banking arrangements of the firm is discussed.

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