Questions from Corporate Finance

Q: Josh Kidding, who has only read part of Chapter 10,

Josh Kidding, who has only read part of Chapter 10, decides to value a real option by (1) setting out a decision tree, with cash flows and probabilities forecasted for each future outcome; (2) decid...

Q: Redo the example in Figure 22.8, assuming that the

Redo the example in Figure 22.8, assuming that the real option is a put option allowing the company to abandon the R&D program if commercial prospects are sufficiently poor at year 2. Use put&acir...

Q: In Chapter 4, we expressed the value of a share of

In Chapter 4, we expressed the value of a share of stock as P0 = EPS1 /r + PVGO where EPS1 is earnings per share from existing assets, r is the expected rate of return required by investors, and P...

Q: True or false? a. Real-options analysis sometimes

True or false? a. Real-options analysis sometimes tells firms to make negative-NPV investments to secure future growth opportunities. b. Using the Black–Scholes formula to value options to invest is...

Q: Describe each of the following situations in the language of options:

Describe each of the following situations in the language of options: a. Drilling rights to undeveloped heavy crude oil in Northern Alberta. Development and production of the oil is a negative-NPV en...

Q: Look again at Table 22.2. How does the value

Look again at Table 22.2. How does the value in 1982 of the option to invest in the Mark II change if a. The investment required for the Mark II is $800 million (vs. $900 million)? b. The present val...

Q: Imagine that Google’s stock price will either rise by 33.3

Imagine that Google’s stock price will either rise by 33.3% or fall by 25% over the next six months (see Section 21-1). Recalculate the value of the call option (exercise price = $530) using (a) the...

Q: Look back at the Malted Herring option in Section 22-2

Look back at the Malted Herring option in Section 22-2. How did the company’s analysts estimate the present value of the project? It turns out that they assumed that the probability...

Q: You own a one-year call option to buy one acre

You own a one-year call option to buy one acre of Los Angeles real estate. The exercise price is $2 million, and the current, appraised market value of the land is $1.7 million. The land is currently...

Q: A variation on Problem 12: Suppose the land is occupied by

A variation on Problem 12: Suppose the land is occupied by a warehouse generating rents of $150,000 after real estate taxes and all other out-of-pocket costs. The present value of the land plus wareho...