1 Your firm is considering a bid for a financially distressed football firm that is in administration. The administrators have said you must pay an exclusivity fee of £500,000 to develop the bid further, show the seriousness of your bid and present your commitment to resolving the issue. There are three potential bidders and the exclusivity fee will guarantee you a period of 1 month in which you will be sole bidder. Since the firm is in administration, your investment will be used to pay off all the outstanding creditors of the firm, who are owed a total of £134 million. Your plan is to enter into a company voluntary agreement (CVA) with the creditors where they will receive £0.06 for every £1 of debt and you have estimated that there is a 50 per cent probability that they will accept. If this were to happen, you estimate the NPV of the bid is £3 million. However, if they do not accept the CVA, the bid will not go ahead and your exclusivity fee will be lost. Your company can borrow and lend at the risk-free rate of 6 per cent per annum. Is it worthwhile for you to pay the exclusivity fee? Explain. (40 marks)

2 What are the benefits of real option methodology over traditional methods? Why, in your opinion, do many firms not use real options to value investments? Explain. (30 marks)

3 In real options analysis, why is the binomial model preferred to Black-Scholes? Explain your answer, using a quantitative example. (30 marks)