Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Q5 Valuing real options - estimating the inputs to the Black Scholes model Delay Real option type 2 Real option expiration, in years 12% Discount

image text in transcribedimage text in transcribed

Q5 Valuing real options - estimating the inputs to the Black Scholes model Delay Real option type 2 Real option expiration, in years 12% Discount rate (WACC) Demand Scenario Pro) 0 30% -25 b 40% -25 30% -25 1 10 a 2 20 15 6 3 30 15 10 10 4 a Estimate the volatility of the project returns using the data above and the INDIRECT METHOD. b How would the value of the real option change if your estimate were twice as large? SHOW WORK HERE, HIGHLIGHT FINAL ANSWER IN YELLOW a 6 Q4 Decision tree analysis Abandon/quit Real option type 1 Real option expiration, in years 15% Discount rate (WACC) 4.0 Salvage value, after tax Demand Scenario Pr() 0 1 2 3 4 5* 40% -25 15 15 15 15 15 b 15% -25 6 6 6 6 15% -25 5 2 2 -7.5 -7.5 d 30% -25 2 0 -10 -10 -10 Salvage value not included a Compute the expected NPV (E[NPV]) of the project based using the data above but ignoring the option to abandon. Should management accept the project? b Compute the standard deviation of the project NPVs across the different scenarios. c Create a new cash flow schedule that accounts for the option to abandon. In which demand scenario(s) should management abandon the project? d What is the new project expected NPV if you allow the real option to be exercised? e What is the new standard deviation of project NPVs if you allow the real option to be exercised? How does this compare to the original standard deviation? f How should you consider changing the discount rate based on your answer in e)? SHOW WORK HERE, HIGHLIGHT FINAL ANSWER IN YELLOW ** Q5 Valuing real options - estimating the inputs to the Black Scholes model Delay Real option type 2 Real option expiration, in years 12% Discount rate (WACC) Demand Scenario Pro) 0 30% -25 b 40% -25 30% -25 1 10 a 2 20 15 6 3 30 15 10 10 4 a Estimate the volatility of the project returns using the data above and the INDIRECT METHOD. b How would the value of the real option change if your estimate were twice as large? SHOW WORK HERE, HIGHLIGHT FINAL ANSWER IN YELLOW a 6 Q4 Decision tree analysis Abandon/quit Real option type 1 Real option expiration, in years 15% Discount rate (WACC) 4.0 Salvage value, after tax Demand Scenario Pr() 0 1 2 3 4 5* 40% -25 15 15 15 15 15 b 15% -25 6 6 6 6 15% -25 5 2 2 -7.5 -7.5 d 30% -25 2 0 -10 -10 -10 Salvage value not included a Compute the expected NPV (E[NPV]) of the project based using the data above but ignoring the option to abandon. Should management accept the project? b Compute the standard deviation of the project NPVs across the different scenarios. c Create a new cash flow schedule that accounts for the option to abandon. In which demand scenario(s) should management abandon the project? d What is the new project expected NPV if you allow the real option to be exercised? e What is the new standard deviation of project NPVs if you allow the real option to be exercised? How does this compare to the original standard deviation? f How should you consider changing the discount rate based on your answer in e)? SHOW WORK HERE, HIGHLIGHT FINAL ANSWER IN YELLOW **

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Handbook Of Digital Media And Communication

Authors: Leah Lievrouw ,Brian Loader

1st Edition

036761233X, 978-0367612337

More Books

Students also viewed these Finance questions

Question

' Which areas depend on inputs from you to get their work donel>

Answered: 1 week ago