Questions from Financial Management

Q: If the company’s capital budgeting analyst decided to show all projected cash

If the company’s capital budgeting analyst decided to show all projected cash flows, both positive and negative, in current dollars rather than inflation-adjusted dollars, would this affect the calcul...

Q: Discuss some ways the company could estimate the project’s risk, and

Discuss some ways the company could estimate the project’s risk, and then explain how risk might be incorporated into the decision analysis.

Q: What are real options, and why are they important to capital

What are real options, and why are they important to capital budgeting?

Q: What’s the difference between a financial option and a real option?

What’s the difference between a financial option and a real option? What are some specific types of real options? Do real options just occur, or can they be “created”?

Q: In theory, market risk should be the only “relevant”

In theory, market risk should be the only “relevant” risk. However, companies focus as much on stand-alone risk as on market risk. What are the reasons for the focus on stand-alone risk?

Q: Real options can be analyzed using a scenario approach with decision trees

Real options can be analyzed using a scenario approach with decision trees or using the Black-Scholes Option Pricing Model. What are the pros and cons of the two approaches? Is one procedure “better”...

Q: Option values are extinguished when they are exercised. How does this

Option values are extinguished when they are exercised. How does this influence capital budgeting decisions? What considerations, or types of analysis, might lead management to “take the plunge” and p...

Q: Suppose a company uses the NPV method, along with risk-

Suppose a company uses the NPV method, along with risk-adjusted WACCs, to calculate project NPVs. However, it has not been considering real options in its capital budgeting decisions. Now suppose the...

Q: Good managers not only identify and evaluate real options in projects—

Good managers not only identify and evaluate real options in projects—they also structure projects so as to create real options. Suppose a company is considering a project to build an electric generat...

Q: In your judgment, what are some characteristics of the type of

In your judgment, what are some characteristics of the type of investor who would likely prefer a high dividend payout, and what are some characteristics of one who would prefer a low payout? Would yo...