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Valuing a Forest as a Call Option: The Sale of Forestry Corporation of New Zealand

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Abstract:

In September 1996, the New Zealand (NZ) Government sold its 100% shareholding in the Forestry Corporation of NZ (FC) to a consortium led by Fletcher Challenge Forests (FF), a publicly listed company, for NZ $2.06 billion. Option pricing methodology is used to value the forest assets that were listed in FC's 1996 Annual Report at $1.853 billion. Total net assets had a book value of $2.03 billion, about $30 million less than the selling price. Assuming a 7.5% real cost of capital and a maximum tax rate of 33%, the actual value of the forest assets realized in the sale (taken to be $1.853 billion) are at a 12.9% discount to the "fair" value of $2.128 billion derived by the option pricing approach. The advantage of this approach to forest valuation over the traditional approach (based on discounted cash flow using projected future prices over long horizons) is that only the volatility of future log prices need be estimated. The relative insensitivity of forest value to this parameter suggests less spread between bid and ask prices by forest buyers and sellers with similar costs of capital, tax rates, and so on. For. Sci. 46(1):32-39.

Keywords: Black and Scholes formula; Call option pricing; forest value sensitivity to cost of capital; log price volatility

Document Type: Journal Article

Publication date: February 1, 2000

More about this publication?
  • Forest Science is a peer-reviewed journal publishing fundamental and applied research that explores all aspects of natural and social sciences as they apply to the function and management of the forested ecosystems of the world. Topics include silviculture, forest management, biometrics, economics, entomology & pathology, fire & fuels management, forest ecology, genetics & tree improvement, geospatial technologies, harvesting & utilization, landscape ecology, operations research, forest policy, physiology, recreation, social sciences, soils & hydrology, and wildlife management.
    Forest Science is published bimonthly in February, April, June, August, October, and December.

    2015 Impact Factor: 1.702
    Ranking: 16 of 66 in forestry

    Also published by SAF:
    Journal of Forestry
    Other SAF Publications
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