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 1PS
Expansion options* Look again at the valuation in Table 22.2 of the option to invest in the Mark II project. Consider a change in each of the following inputs. Would the change increase or decrease the value of the expansion option?
- a. Increased uncertainty (higher standard deviation).
- b. More optimistic
forecast (higher expected value) of the Mark II in 1985. - c. Increase in the required investment in 1985.
a.
Expert Solution
Summary Introduction
To discuss: The changes if there is an increase in uncertainty.
Explanation of Solution
The reasons on the changes if there is an increase in uncertainty is as follows:
The worth of the expansion options increase if the uncertainty increases.
b.
Expert Solution
Summary Introduction
To discuss: The changes if there is more optimistic forecast.
Explanation of Solution
The reasons on the changes if there is more optimistic forecast is as follows:
The worth of the expansion options increases due to this the expected cash flows are higher. This caused due to the increase in the more optimistic forecast.
c.
Expert Solution
Summary Introduction
To discuss: The changes if there is an increase in required investment.
Explanation of Solution
The reasons on the changes if there is an increase in required investment is as follows:
The worth of the expansion options decrease if there is an increase in the required investment.
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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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