Real Options The Webber Company is an international conglomerate with a real estate division that owns the
Question:
Real Options The Webber Company is an international conglomerate with a real estate division that owns the right to erect an offi ce building on a parcel of land in downtown Sacramento over the next year. This building would cost $10.5 million to construct. Due to low demand for offi ce space in the downtown area, such a building is worth approximately $10 million today. If demand increases, the building would be worth $12.5 million a year from today. If demand decreases, the same offi ce building would be worth only $8 million in a year. The company can borrow and lend at the risk-free rate of 2.5 percent effective annual rate. A local competitor in the real estate business has recently offered $750,000 for the right to build an offi ce building on the land. Should the company accept this offer? Use a two-state model to value the real option. LO.1
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