Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
12th Edition
ISBN: 9781259144387
Author: Richard A Brealey, Stewart C Myers, Franklin Allen
Publisher: McGraw-Hill Education
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Textbook Question
Chapter 22, Problem 18PS
Real options Respond to the following comments.
- a. “You don’t need option pricing theories to value flexibility. Just use a decision tree. Discount the cash f lows in the tree at the company cost of capital.”
- b. “These option pricing methods are just plain nutty. They say that real options on risky assets are worth more than options on safe assets.”
- c. “Real-options methods eliminate the need for DCF valuation of investment projects.”
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Check out a sample textbook solutionStudents have asked these similar questions
Which of the following statements is FALSE?
A.
You invest today only when the NPV of investing today exceeds the value of the option of waiting, which from option pricing theory we know to be always positive.
B.
When you do not have the option to wait, it is optimal to invest in any
positive−NPV
project.
C.
One way to see why you sometimes choose not to invest in a
positive−NPV
project is to think about the decision of when to invest as a choice between two mutually exclusive projects: (1) invest today or (2) wait.
D.
When you have the option of deciding when to invest, it is usually optimal to invest only when the NPV is positive but close to zero.
Financial advisors generally recommend that their clients allocate more to higher risk–return asset classes (like equities) if their investment horizons are long.
Is this advice consistent with the basic M-V model?
Does adding a shortfall constraint to the M-V model make a difference? If so, how? If not, why not?
Assuming investment opportunities change over time, what type of asset return behavior would justify this advice within the M-V framework?
d. Consider the following statement "If an analyst decides to use real options
methodology to value a project, estimating a standard Discounted Cash Flow
model is useless". Do you agree with this statement? Explain your answer.
Chapter 22 Solutions
Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 22 - Expansion options Look again at the valuation in...Ch. 22 - Prob. 2PSCh. 22 - Prob. 3PSCh. 22 - Prob. 4PSCh. 22 - Prob. 5PSCh. 22 - Prob. 6PSCh. 22 - Real options True or false? a. Real-options...Ch. 22 - Prob. 8PSCh. 22 - Prob. 9PSCh. 22 - Expansion options Look again at Table 22.2. How...
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- True or Falsearrow_forwardLet C be the price of a call option to purchase a security whose present price is S. Explain why C is less than or equal to S. I'm just thinking it wouldn't make financial sense to pay more for the call option than the present price of the security. I'm not sure if there is more of an explanation that is needed. I was also wondering is there any time when it would be favorable to pay more for the call option than the present price of the security?arrow_forwardConsider the following statement: “In contexts of increased uncertainty, the usefulness of real options when valuing an investment opportunity increases”. Do you agree with this statement? Explain your answer.arrow_forward
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