Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Hello! I am struggling with figuring out some of these equations to solve the problems! I Attempts: 3 Keep the Highest: 3,' IS 3. Estimating
Hello! I am struggling with figuring out some of these equations to solve the problems! I
Attempts: 3 Keep the Highest: 3,' IS 3. Estimating the inputs using the option pricing model in the option analysis of the investment timing option Option analysis Involves gathering significant amounts of Information, synthesizing the data, and using the data In models applied In opbon analysis consider the case of RTE Com Inc.: RTE Com Inc. is considering a project for a new cloud-based online storage system for companies and individuals to back up their data. The cost of the project IS $55 million, but the future cash flows depend on how this new cloud-based online storage Will compete with existing companies that offer online data backup. The company believes that this project has a strong selling feature but is uncertain that It would earn cash flows as projected. The team proposing this project has come up with the follow.'lng data. Demand High Ave rage Project's cost of capital Life of project 52-ueek Treasury note probability Annual cash Flow $50 million $35 million $15 million 17.00% Three years The project team also noted that the company has an option to wait for one year in order to see Its competitors' positions and observe how the market responds This Will help In getting more Information about marketdemand and in figuring out which setof cash flows Will cccur_ Analysts used different approaches toevaluate the project, but the management team Insists that the Black-Scholes option pricing model (OPM) Will help them make a more Informed decision. The model requires five Inputs: (L) the risk free rate, (2) the time until the opbon expires, (3) the strike price, (4) the current price of the stcck, and (5) the variance of the stcck's rate of returm You need tocalculate both the value of the underlying asset and its rate of returm For RTE Com Inc., the underlying asset is the project Itself. The current value of the project Will be the value of Its expected cash flows Based on the data given, calculate the value of the project, Its return, and the standard deviation of the returns (using the direct method) if the company decides to wait for a year. (cash flow values in the table are in millions.) Return = (pv cash Flowst - pv cash flowso) / PV Cash flowso Now: Yr O High Ave rage Yrl Yr2 Yr3 Yr4 pv cash flows (t=l) pv cash flows (t=o) probability Return probability x pv Cash flowst 040 Expected return (t=l): standard deviation of returns: Expected Value of PVs (t=l): Expected Value of PVs (t=o):
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started