A valuation model for firms with stochastic earnings

In this paper, a model is set up for valuing a firm with stochastic earnings. It is assumed that the earnings of the considered firm follow a time-varying mean reverting stochastic process. It is shown that the value of the firm satisfies a boundary value problem of a second-order partial differential equation, which can be solved numerically. Special cases are discussed. Analytic solution is found for one special case. Moreover it is shown that the analytic solution is consistent with a previous result obtained by other researchers.