1. TENTH CANADIAN EDITION INTERMEDIATE ACCOUNTING PREPARED BY: Lisa Harvey, CPA, CA Rotman School of Management, University of Toronto 1 CHAPTER 16 Appendix 16C Advanced Models for Measuring Fair Value Kieso Weygandt Warfield Young Wiecek McConomy

2. Options Pricing Models Two examples 1.The Black-Scholes option pricing model 2.Binomial tree option pricing model Inputs in the models: –Exercise price –Expected life of the option –Current market price of underlying asset –Volatility of underlying asset –Expected dividend during life of option –Risk-free rate during life of option Copyright John Wiley & Sons Canada, Ltd. 2

3. Black-Scholes Model Often used to estimate fair values of options for publicly traded companies This model has two components – an intrinsic value component and a time value component Copyright John Wiley & Sons Canada, Ltd. 3

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