Principles of Corporate Finance
13th Edition
ISBN: 9781260465099
Author: BREALEY, Richard
Publisher: MCGRAW-HILL HIGHER EDUCATION
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Chapter 22, Problem 12PS
a.
Summary Introduction
To determine: The present value of payoffs.
a.
Expert Solution
Answer to Problem 12PS
The present value of payoffs is $16,875,000.
Explanation of Solution
Determine the present value of payoffs
Excel Spreadsheet:
Therefore the present value of payoffs is $16,875,000.
b.
Summary Introduction
To determine: The abandonment value.
b.
Expert Solution
Answer to Problem 12PS
The abandonment value is $1,936,448.60.
Explanation of Solution
Determine the gain value
The gain value is calculated if the demand is buoyant.
Therefore the gain value is 33.33%.
Determine the loss value
The loss value is calculated if the demand is sluggish.
Therefore the loss value is -11.11%.
Determine p
The value of put can be calculate using the risk neutral method, were p is identical to the probability of increase in the asset value.
Therefore p is 0.408.
Determine the abandonment value
If the demand is sluggish the payoffs will be $0 and if the demand is buoyant the payoffs is $3,500,000.
Therefore the abandonment value is $1,936,448.60.
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Chapter 22 Solutions
Principles of Corporate Finance
Ch. 22 - Real options Respond to the following comments. a....Ch. 22 - Prob. 2PSCh. 22 - Real options True or false? a. Real-options...Ch. 22 - Prob. 4PSCh. 22 - Real options Describe each of the following...Ch. 22 - Expansion options Look again at the valuation in...Ch. 22 - Expansion options Look again at Table 22.2. How...Ch. 22 - Prob. 8PSCh. 22 - Timing options Look back at the Malted Herring...Ch. 22 - Prob. 10PS
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