Explanation After the wait of one year, the project will be bought if its value is greater than $70 million. This option is like ‘call option’ that has the exercise price of $70 million and expiry date of 1 year. Current prices of stock is the ‘current value of the future cash flows of the project’; and variance of stock return is the ‘variance of the project’s rate of return ’. The present value of future cash flows of all the stock is the price of stock. The present value of the cash flows after the exercise date is the price of the real option. Stock price is not affected by the exercise cost. Current value of the underlying asset is not affected by the cost to implement the real option. If the later parts are break into two parts then the calculation will be easier. The value of the cash flows beyond the exercise date is calculated first and then the expected present values are calculated of those cash flows. Calculation of cash flows beyond the exercise date is as follows: 0 1 2 ($) 3 ($) 4 ($) High 45 45 45 Average 30 30 30 Low 15 15 15 Table (1) Formula to calculate NPV in case of high demand is as follows: NPV = $ 45 ( 1 + 10 % ) + $ 45 ( 1 + 10 % ) 2 + $ 45 ( 1 + 10 % ) 3 = $ 111.91 Formula to calculate NPV in case of Average demand is as follows: NPV = $ 30 ( 1 + 10 % ) + $ 30 ( 1 + 10 % ) 2 + $ 30 ( 1 + 10 % ) 3 = $ 74

Estimate: The value of the investment timing option using ‘financial option pricing model’.

You just graduated with MBA in Accounting and Finance from the University of Professional Studies and are employed by JEK Investments Ltd, a brokerage firm in Ghana. Kweku The Don, an illiterate businessman, visited your firm for a piece of investment advice and possibly make some investments. Although an accomplished businessman, he was advised by hisson to buy some shares on the Ghana Stock Exchange in other to diversify his portfolio. Your boss has asked you to consider either Cronox Industries or Zealous Incorporated The share prices and dividends for the two companies and the returns on the Ghana Stock Exchange are shown below for the period 2016– 2021. Cronox Industries Zealous Incorporated Year Stock price Dividend (GH¢) Stock price Dividend (GH¢) GSE Returns (Market Returns) 2016 7.62 - 55.75 - - 2017 12 0.90 60.00 2.25 0.07 2018 10.75 0.95 57.25 2.50…

A close friend of your father has a medium-sized firm with about 400 employees. You overheard him mention to your father that he was considering "taking the firm public" in order to access more money for expansion. He suggested your father invest in the company at that time. Since you are a finance major your father asked you later what you thought about the opportunity and exactly what was involved in "taking the firm public." What financial statements would he need to provide to potential investors? Would it be better for him to issue a bond? explains the process involved in "taking a firm public" and issuing common stock that will then be traded on an organized exchange?

Mr. John is the financial manager of XYZ Company Ltd., which deals in FOREX trading.The company is doing well and the volume of transactions is up to the target. It is starting a newpolicy to attract the corporate treasurer and other financial executives to invest in risk-free optiontrading. Mr. X has been assigned the task of meeting the prospective investor and explaining thecompany’s risk management policy, features of options, and benefits of trading in options tothem. He has to convince the investors about the advantages and uniqueness of trading inFOREX, especially in option contracts.As a representative of the company, he suggests to the client how an option can be profitablyused for hedging FOREX currency risk. The trading environment is very favorable and thegovernment has recently announced liberal policies to encourage individual investors toparticipate in the financial market. Assume that the Sensex and Nifty has already attained 41000and 12100 level and is expected to move…

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A friend of yours, a non-accounting student in the JRSSB, has asked for your advice about a potential investment. Your friend is considering purchasing shares in Aurora Cannabis Inc., a company with its head office in Leduc, Alberta, that is publicly traded on the Toronto Stock Exchange and other exchanges (symbol ACB). The company's primary business is the production, distribution, and sale of cannabis related products in Canada and internationally. Your friend thinks this company might be a good investment, as the share price is quite low, but is not sure how to interpret certain parts of the financial statements. In particular, your friend has read note 9 (Biological Assets) and is having difficulty understanding the meaning of this information. (The note disclosure is included as an appendix to this document.) Required: Write a memo to your friend that answers the following questions about the Aurora Cannabis Inc. financial statements. (30 marks) 1) How does the accounting for…

Assume that you are nearing graduation and that you have applied for a job at a local bank. As part of the bank’s evaluation (interview) process, you have been asked to take an exam that covers several financial analysis techniques. The hiring decision depends on how you would answer the following questions: Part I: TVM Analysis. The first section of the test addresses time value money analysis.John andMaryareayoungcouple, who want to put their finance in order. Boththehusbandandthe wifeare27yearsagoandinstableemployment. They want to manage their savings and earnings to achieve a better return and reduce the risks. You want to help them with their financial planning by answering a series of questions as follows: ThegreatAlbertEinsteinoncesaid“Compoundinterestistheeighthwonderofthe world. He who understands it earns it...he who doesn't...pays it.” Whatisthefuture value of an initial $500 after 30 years if it is invested in an account paying 15 percent annual interest? What is the…

Hi! I am having difficulty with an analysis that I have to do on the attached minicase. The hint that we were provided to go off of is as follows: Focus on comparable rates of return investors can expect to receive and compare to Bernice’s target book value return on equity. Use the CAPM calculations and consider WACC as well. The tables are attached, and the Case is: Bernice Mountaindog was glad to be back at Sea Shore Salt. Employees were treated well. When she had asked a year ago for a leave of absence to complete her degree in finance, top management promptly agreed. When she returned with an honors degree, she was promoted from administrative assistant (she had been secretary to Joe-Bob Brinepool, the president) to treasury analyst. Bernice thought the company’s prospects were good. Sure, table salt was a mature business, but Sea Shore Salt had grown steadily at the expense of its less-well-known competitors. The company’s brand name was an important advantage, despite the…

You were recently hired to work in the controller's office of the Balboa Lumber Company. Your boss, Alfred Eagleton, took you to lunch during your first week and asked a favor. "Things have been a little slow lately, and we need to borrow a little cash to tide us over. Our inventory has been building up and the CFO wants to pledge the inventory as collateral for a short-term loan. But I have a better idea." Mr. Eagleton went on to describe his plan. "On July 1, 2021, the first day of the company's third quarter, we will sell $100,000 of inventory to the Harbaugh Corporation for $160,000. Harbaugh will pay us immediately and then we will agree to repurchase the merchandise in two months for $164,000. The $4,000 is Harbaugh's fee for holding the inventory and for providing financing. I already checked with Harbaugh's controller and he has agreed to the arrangement. Not only will we obtain the financing we need, but the third quarter's before-tax profits will be increased by $56,000, the…

You were planning to purchase a house this month with a mortgage and just learned that the Fed is conducting open market purchase. Your situation is flexible in terms of the timing of the purchase; right now or later. It is assumed that everything else stays constant. What'd be the best strategy for your purchase? Explain using economic theory, not as a personal finance advisor

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Imagine that you are an accountant working for Los Angels Group. Mr. Todd Smith, an investor, moving from California to Texas, is an eager investor looking to set up a business in the Southeast Texas area decided to invest in the 60x rooms hotel close to the new location of the Tesla manufacturing warehouse and Amazon fulfillment center.Mr. Smith is undecided on what type of benefit packages his company can offer to promote employee retention while maximizing profits. Mr. Smith reached the Los Angels Group for advice on the pros and cons of offering employees retirement benefits. Mr. Smith is interested in maximizing revenues, decreasing tax obligations, and increasing employee retention. Mr. Smith needs to make a decision by 05/22/24.

Estimate: The value of the investment timing option using ‘financial option pricing model’.

Solution Summary: The author explains the value of the investment timing option using 'financial option pricing model'.

Estimate: The value of the investment timing option using ‘financial option pricing model’.

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Chapter 26 Solutions