Introduction to Binomial Lattices




About the Course:

What is more robust than discounted cash flow analysis and more flexible than Black-Scholes Option Pricing Models? Here is another hint: Which valuation methodology enables the analyst to make assumptions about dilution, probabilities of success and volatility? What model allows these assumptions to be easily changed over time?

The answer is Binomial Lattices.

This session provides a solid overview for applying Binomial Lattices which are used for evaluating emerging technologies and early-stage private companies.

The following are among the issues discussed:

  • Definitions of critical inputs such as strike price, time to maturity, vesting period and appraised fair market value of equity
  • When to use European vs. American options in the model
  • Determining the risk free rate
  • Why the log of the risk free rate should be used in the model
  • How to handle probabilities associated with options
  • Constructing one- and multi-period binomial trees
  • How binomial lattices account for dilution

Course Leader: Dr. Keith F. Sellers, LaGrange Eminent Scholar of Business Valuation and Director of the Center for Business Valuation Research and Education at the University of North Alabama

Dr. Sellers has performed extensive research into the determinants of value of closely held companies, as well as the stock market perceptions of employee stock ownership plan sponsorship. His research has been published in such journals as the Journal of Accountancy, Accounting Horizons, the Journal of the American Taxation Association, the National Tax Journal, the Journal of Business Finance and Accounting and Research in Accounting Regulation. Dr. Sellers is the president of Financial Valuation Services, Inc., a business valuation firm with clients in twenty states, and is cofounder of Derivative Valuation Services. Dr. Brett A. King, State Farm Endowed Professor of Risk Management and Professor of Finance at the University of North Alabama

Prior to obtaining his doctorate in Finance from the University of Alabama, Professor King was a financial analyst for Wells Fargo. In addition to accounting and valuation-related research, Dr. King is also active and published in the fields of derivatives, corporate finance, investments, risk management and political economics. Dr. King is a member of the FMA, is co-editor of The Journal of Business, Industry and Economics, a Senior Fellow of the Center of Public Policy and Economic Research and is a Senior Research Professional for the College of Business at the University of North Alabama.

Course Length: Approx. 1.5 hours

Also included: White Paper entitled “Introduction to Binomial Lattices & the Valuation of Employee Stock” (28 pgs.)

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