The Valuation of a Firm Advertising
Optimally
D. Epstein, N.Mayor, P.Schonbucher, A.E. Whalley, P.
Wilmott
Abstract
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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