Question
Problem #2 A restaurant is producing net cash flows, after out-of-pocket expenses, of $600,000 per year (forever). There is no upward or downward trend in
Problem #2
A restaurant is producing net cash flows, after out-of-pocket expenses, of $600,000 per year (forever). There is no upward or downward trend in cash flows, but they fluctuate a lot, following a random walk, with an annual standard deviation of 15%. The hurdle return for the restaurant is 12%. The risk-free rate is 5%. The real estate occupied by the restaurant is owned and can be sold for $5 million and its value is stable. Any decisions by the firm will be acted on in 1 year.
- Draw the decision tree for this problem with labels.
- How much is the value of the restaurant without the abandonment consideration?
|
| Put Option |
| Market price (S) |
|
| Strike price (K) |
|
| Time in years |
|
| Percent Up |
|
| Interest rate |
|
| Option Price |
|
- How much is the value of the restaurant with the abandonment consideration?
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Applied Financial Macroeconomics And Investment Strategy
Authors: Robert T McGee
1st Edition
1137428394, 978-1137428394
