Gen Combo Looseleaf Principles Of Corporate Finance With Connect Access Card
Gen Combo Looseleaf Principles Of Corporate Finance With Connect Access Card
13th Edition
ISBN: 9781260695991
Author: Richard A Brealey
Publisher: McGraw-Hill Education
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Chapter 22, Problem 3PS

Real options True or false?

  1. a. Real-options analysis sometimes tells firms to make negative-NPV investments to secure future growth opportunities.
  2. b. Using the Black–Scholes formula to value options to invest is dangerous when the underlying investment project would generate significant immediate cash flows.
  3. c. Binomial trees can be used to evaluate options to acquire or abandon an asset. It’s OK to use risk-neutral probabilities in the trees even when the asset beta is 1.0 or higher.
  4. d. It’s OK to use the Black–Scholes formula or binomial trees to value real options, even though the options are not traded.
  5. e. A real-options valuation will sometimes reveal that it’s better to invest in a series of smaller plants rather than a single large plant.
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