Lucent Technologies, Inc.: using structural models to value debt (and equity)

Purpose – The purpose of this paper is to show how contingent claim valuation and, more precisely, structural models, can be used to value the debt and the equity of a corporation. The objective is to provide a general and unified valuation framework. Design/methodology/approach – A discrete version of the Geske model in a binomial-like environment is implemented. To make the analysis more applied, real data of a corporation – Lucent Technologies, Inc. are used – and the valuation is attempted. Findings – Structural models can be used as a practical valuation tool. The results that are obtained are close to market data. Additionally, the authors are able to determine the price of some non-traded claims (debt). Research limitations/implications – While the more direct implication is that structural models can be used as a practical valuation tool, more applied research is needed to better calibrate the models. Originality/value – To the applied finance literature is contributed by presenting a way of estimating the value of corporate debt and equity by calibrating a discrete version of Geske model. It is believed that this approach is not only interesting from the academic point of view, but can also serve as a useful tool for practitioners.