PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Question
Chapter 10, Problem 22PS
a
Summary Introduction
To discuss: The real options for each case.
b
Summary Introduction
To discuss: The real options for each case.
c
Summary Introduction
To discuss: The real options for each case.
d
Summary Introduction
To discuss: The real options for each case.
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Internationalization theory suggests that
Select one:
a. FDI is more likely to take place when the costs of negotiating, monitoring, and enforcing a contract with a second firm is
higher.
Ob. FDI is more likely to occur when prices are high, competition is intense and lower trade barriers as well as exchange rates
are strong.
O c. FDI occurs in developing countries only in order to boost their economies and improve the country position.
d. None of the options are applicable.
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This is an open ended question and you need to do some research to get the answers:
Is arbitrage good or bad? Justify.
What are some problems with the Black-Scholes-Merton model?
Suggest some improvements of the Black-Scholes-Merton model.
In the class, we have derived the Black-Scholes-Merton formula for European options. Is is possible to derive something similar for American options?
Which of the below statements is false about real options?
A. Real options increase firm value
B.Investing in a project can be priced as an American call option
C.Abandoning a project can be priced as an American put option
D.Growth options have no impact on the market value of the firm
Chapter 10 Solutions
PRIN.OF CORPORATE FINANCE
Ch. 10 - Terminology Match each of the following terms to...Ch. 10 - Project analysis True or false? a. Sensitivity...Ch. 10 - Sensitivity analysis Otobais staff (see Section...Ch. 10 - Prob. 4PSCh. 10 - Prob. 7PSCh. 10 - Scenario analysis What is the NPV of the electric...Ch. 10 - Prob. 9PSCh. 10 - Break-even analysis Break-even calculations are...Ch. 10 - Prob. 11PSCh. 10 - Prob. 12PS
Ch. 10 - Prob. 13PSCh. 10 - Break-even analysis A financial analyst has...Ch. 10 - Fixed and variable costs In a slow year, Deutsche...Ch. 10 - Operating leverage You estimate that your cattle...Ch. 10 - Prob. 17PSCh. 10 - Prob. 20PSCh. 10 - Real options Explain why options to expand or...Ch. 10 - Prob. 22PSCh. 10 - Real options True or false? a. Decision trees can...Ch. 10 - Prob. 24PSCh. 10 - Real options An auto plant that costs 100 million...Ch. 10 - Decision trees Look back at the Vegetron electric...Ch. 10 - Prob. 27PSCh. 10 - Prob. 28PSCh. 10 - Prob. 29PSCh. 10 - Prob. 32PS
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- 4. Introduction to real options Consider the following statement about real options: Decision tree analysis is more commonly used in valuing securities than real assets. True or False: The preceding statement is correct. True False Which type of real option allows a project to be expanded if demand turns out to be greater than expected? Flexibility option Abandonment option Expansion option Timing option Consider the following example: Smoltz Motors has plants around the country that specialize in specific models of cars. Smoltz has determined that lower demand has led the firm’s inventory of SUVs to be too high. Smoltz wants to stop production for its SUVs and focus on its sedans. This example describes a real option to (expand/ abandon) . Please do not answer in excel, use math formulas Thank you!arrow_forward4. Introduction to real options Consider the following statement about real options: Sometimes real options can give managers the flexibility to decide to invest in a project or wait to make a more calculated decision. True or False: The preceding statement is correct. False True Which type of real option allows the output and/or inputs in the production process to be altered, depending on how market conditions change during a project’s life? A. Expansion option B. Flexibility option C. Abandonment option D. Timing option Consider the following example: Clemens Inc. is considering a $100 million investment in a new line of soft drinks. However, $100 million is a huge investment for Clemens; if things turn bad, it could wipe out the company. A few senior managers have suggested a smaller investment of $20 million to see if the market is as strong as they hope it is. If demand is strong and the opportunity is still…arrow_forwardWhich 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.arrow_forward
- Which of the following will NOT increase the value of a real (call) option? Group of answer choices: A decrease in the probability that a competitor will enter the market of the project in question. An increase in the risk-free rate A decrease in the cost of obtaining the real option Lengthening the time in which a real option must be exercised. A decrease in the volatility of the underlying source of risk.arrow_forward2. Consider the model of Moral Hazard where firms choose between investing one unit of output in a less risky or more risky project. The safer project yields with probability and zero otherwise while the risky project yields 2 with probability and zero otherwise i.e. TG = G = TB B = 2. Suppose firms finance their investment by borrowing 1 unit from a the fiinancial market at interest rate R. The financial market is risk neutral and requires an expected rate of return equal to the risk free rate which is assumed to be zero. Will there be an equilibrium with lending to firms from the financial market A. Yes B. No C. Not enough information D. None of A-Carrow_forwardWhich of the following contributes positively to the value of a real option to delay investment? First-mover competitive advantages It lowers idiosyncratic risk, and thus the firm's cost of capital Delaying project revenues, due to TVM The likely resolution of some uncertaintyarrow_forward
- When an MNC restructures its operations to reduce its economic exposure, it may sometimes forgo economies of scale. Explain. (See Ch 12, Q4)arrow_forwardWhich of the following statements is correct? a. Since investors prefer more return and less risk, one will never hold a dominated asset in the risk-return sense. In other words, if asset A has a higher expected return and lower standard-deviation than asset B, then investors would only hold asset A in their optimal portfolio. b. The IRR method correctly ranks mutually exclusive projects. c. When an investment project is evaluated today, the spending that occurred in the last year has to be included in the NPV analysis. d. The payback period criterion properly considers the time value of money. e. When there are two mutually exclusive projects, the project with the highest NPV should be chosen.arrow_forwardA Moving to another question will save this response. Question 2 An increase in the market risk premium will generally O make the security market line steeper O reduce the cost of equity O induce the firm to select riskier projects O induce the firm to select projects with higher betas Shot on vivo Z1x WIDE Vivo Al calmeiag to another question will save this response.arrow_forward
- The project is accepted اخترأحد الخيارات a. If the profitability index is zero b. if the profitability index is less than one c. If the profitability index is greater than hundred d. If the profitability index is negative e. None of the option What is the limitation of Traditional approach of Financial Management? اخترأحد الخيارات a. All of the option b. More emphasis on long term problems c. Ignores allocation of resources d. One-sided approacharrow_forwardThe company is considering hedging its copper production. It thinks that prices are highly likely to rise in the near future, it should a buy itm puts b buy otm puts c sell otm calls d do nothingarrow_forwardFinancial 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?arrow_forward
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