Yardie Global is considering expanding a cruise line division next year (t=1) or waiting a y due to public health concerns. The cruise line has a discount rate of 11 percent and has a NPV today (t=0) of $40M. If they wait one year for market research, there is a 30 percent chance that the NPV next year (t=1) could be $150M and 70 percent chance that they wi the division for $2M. The company can consider the option to sell the division as similar to O taking a long position on a put option with a strike price equal to $2M. taking a long position on a call option with a strike price equal to $40M
Yardie Global is considering expanding a cruise line division next year (t=1) or waiting a y due to public health concerns. The cruise line has a discount rate of 11 percent and has a NPV today (t=0) of $40M. If they wait one year for market research, there is a 30 percent chance that the NPV next year (t=1) could be $150M and 70 percent chance that they wi the division for $2M. The company can consider the option to sell the division as similar to O taking a long position on a put option with a strike price equal to $2M. taking a long position on a call option with a strike price equal to $40M
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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am. 336.
Transcribed Image Text:**Yardie Global's Expansion Decision: An Educational Case Study**
Yardie Global is evaluating the possibility of expanding its cruise line division next year (t=1) or postponing the decision due to health concerns. Currently, the cruise line has a discount rate of 11% and a net present value (NPV) today (t=0) of $40 million.
If Yardie Global waits one year to gather market research, there is a 30% probability that the NPV next year (t=1) could reach $150 million. Conversely, there is a 70% probability that the division will only be sold for $2 million.
The company must consider their option to sell the division, compared to a financial option, similar to:
- Taking a long position on a put option with a strike price equal to $2 million.
- Taking a long position on a call option with a strike price equal to $40 million.
- Taking a long position on a call option with a strike price equal to $2 million.
This scenario explores financial decision-making under uncertainty and examines strategic options.
Expert Solution
Step 1: Define=call option
Call option gives the opportunity to the buy the assets at given prices but there is no obligation to do that any way.
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