A company is considering a project. It has only 10% debt in its capital structure, with...
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A company is considering a project. It has only 10% debt in its capital structure, with a pre-tax cost of 8%. It has a beta of 1.4; the risk free rate is 5%, and the equity risk premium is 6.5%. The project would be 90% equity funded. This would require an investment of $700,000 at the end of year 5 and this would produce a stream of cash flows with a present value of $650,000 at the end year 5. The volatility of the cash flows is 35% Assume WACC is 13.25%. The company considers this project to be a real option. Find the value of this real (call) option. (Total 25 Marks) A company is considering a project. It has only 10% debt in its capital structure, with a pre-tax cost of 8%. It has a beta of 1.4; the risk free rate is 5%, and the equity risk premium is 6.5%. The project would be 90% equity funded. This would require an investment of $700,000 at the end of year 5 and this would produce a stream of cash flows with a present value of $650,000 at the end year 5. The volatility of the cash flows is 35% Assume WACC is 13.25%. The company considers this project to be a real option. Find the value of this real (call) option. (Total 25 Marks)
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Answer rating: 100% (QA)
To calculate the value of the real call option we can use the BlackScholes option pricing model The ... View the full answer
Related Book For
Fundamentals of Financial Management
ISBN: 978-0324664553
Concise 6th Edition
Authors: Eugene F. Brigham, Joel F. Houston
Posted Date:
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