ABSTRACT
Risk factors are common to most financial management problems, whether they relate to exchange risks, bankruptcies, technological obsolescence, takeovers or fiscal shifts. However, although financial models need to reflect such aspects, these are different characteristics of risk. Predictive methods, particularly multiple discriminant analysis, have more frequently been used in studies into corporate failure. Economics researchers have frequently applied models that were originally designed for the natural sciences. Geometric Brownian motions have been used to model interest rates, exchange rates and inflation rates, as well as underlying cash flows in options valuations. In the model that follows dividends will be treated as an explanatory variable of price. A geometric Brownian motion, to model less dramatic variations, has been combined with a Poisson jump. By solving a second-order linear ordinary differential equation, a share valuation model has been derived that can be applied either to shares subject to takeover threats or to significant bankruptcy risks.
