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Merton model

L

lovitta

Member
In the merton model, why is the current value of the company's assets V unknown. (page 21 of Chapter 15). Can we not simply value the assets the company currently holding?
 
The Merton model is a theoretical model of how the company is structured. It aims to work out all the values from first principles. So, for example, you can't just look up the company's current share price and use that number in the equations.

The model assumes that the company's assets consist of shares and bonds, and the aim of the model is to calculate the current value of those bonds. Since we don't know the value of the bonds, we wouldn't be able to calculate directly the current value of the company's assets!
 
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