Executive Summary of Financial Strategies with Real Options

Most companies identify some problems with financial strategies, which make them inefficient and sluggish. Financial managers can change the situation by using real options. According to Modigliani and Miller, the capital structure is irrelevant to the company’s performance, but the higher interest payment will weaken the physical strength of the company in the long term, and huge amounts of debt will tighten the company’s credit lines. The financial managers can improve the capital structure and pursue long-term growth more successfully through using real options, instead of debt and equity finances. As the real options dealing with uncertain value changes are based on the intrinsic value, i.e. future cash flows, of the underlying assets, projects and companies, the evaluation method is more accurate than the existing ones, which would induce divestitures, restructurings, investment projects and M&As. Although there is no market for real options, the fundamental ideas and concepts of real options are the same as financial options. Real options can be applicable to any fields with uncertain value changes and building financial models with real options will be an innovation to break through the difficulties. Financial managers could develop financial model innovations to support mainstream businesses and new projects.