Question 4 2/2 pts You are considering entering the shoe business. You believe that you have a narrow window for entering this market. Because of Christmas demand, the time is right today, and you believe that exactly a year from now would also be a good opportunity. Other than these two windows, you do not think another opportunity will exist to break into this business. It will cost you $35 million to enter the market. Because other shoe manufacturers exist and are public companies, you can construct a perfectly comparable company. Hence, you want to use the Black-Scholes formula to decide when and if you should enter the shoe business. Your analysis implies that the current value of your shoe company would be $40 million, and that the volatility is 25% per year. Of the $40 million current value, $6 million is coming from the free cash flows expected in the first year. The risk-free rate is 4%. What is the value of the investment opportunity if you choose to wait? (Hint: think of the investment as a call option) $1.03 million $5.72 million Correct! $3.54 million $10.29 million Question 5 0/1 pts In the prior question, what is the value of the investment opportunity if you enter the shoe market today? And given this, when should you enter the market (if at all)? You Answered Value today = $3 million... so enter next year Correct Answer Value today = $5 million... So enter now Value today --$1 million... so never enter Value today = $34 million... so enter now Question 4 2/2 pts You are considering entering the shoe business. You believe that you have a narrow window for entering this market. Because of Christmas demand, the time is right today, and you believe that exactly a year from now would also be a good opportunity. Other than these two windows, you do not think another opportunity will exist to break into this business. It will cost you $35 million to enter the market. Because other shoe manufacturers exist and are public companies, you can construct a perfectly comparable company. Hence, you want to use the Black-Scholes formula to decide when and if you should enter the shoe business. Your analysis implies that the current value of your shoe company would be $40 million, and that the volatility is 25% per year. Of the $40 million current value, $6 million is coming from the free cash flows expected in the first year. The risk-free rate is 4%. What is the value of the investment opportunity if you choose to wait? (Hint: think of the investment as a call option) $1.03 million $5.72 million Correct! $3.54 million $10.29 million Question 5 0/1 pts In the prior question, what is the value of the investment opportunity if you enter the shoe market today? And given this, when should you enter the market (if at all)? You Answered Value today = $3 million... so enter next year Correct Answer Value today = $5 million... So enter now Value today --$1 million... so never enter Value today = $34 million... so enter now
