PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Chapter 10, Problem 23PS
Real options True or false?
- a. Decision trees can help identify and describe real options.
- b. The option to expand increases PV.
- c. High abandonment value decreases PV.
- d. If a project has positive
NPV , the firm should always invest immediately.
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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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- When Building a Portfolio Optimization Model, Exceeding the constraints would result in what??????????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_forwardAnother name for the expected value of an investment would be: Answer a. The mean value b. The upper-end value c. The certain value d. The risk-free valuearrow_forward
- Explain in general terms what each of the following real options is and how it could changeprojects’ NPVs and their corresponding risk relative to what would have been estimated ifthe options had not been considered.a. Abandonmentb. Timingc. Growthd. Flexibilityarrow_forwardThe best investment ____________________. Select one or more: a. maximizes reward b. maximizes Sharpe c. minimizes risk d. eliminates riskarrow_forwardTrue / False and explain (if the statement is false, explain why it is incorrect) 1. Simulation analysts uses best- and worst case scenarios to determine the most likely outcome 2. In the absence of capital rationing, the firm should take all projects with a positive net present value.arrow_forward
- Which statements are INCORRECT? Check all that apply: when IRR is positive, the project is acceptable when profitability index is positive, the project is acceptable a decrease in a firm's WACC will increase the attractiveness of the firm's investment options when required return is less than internal rate of return, the project is acceptablearrow_forwardExplain why the following statement is true: In general, the more uncertainty thereis about future market conditions, the more attractive an investment timing optionwill be, other things held constant.arrow_forwardIf you have a project combined with above-average market risk, which one of the following decisions should you make? Accept if the IRR is greater than the WACC. Use a higher discount rate than the WACC to reflect the project's risk and accept if NPV is positive at this higher discount rate. Accept if the cash flows discounted at the WACC have a positive NPV. Discount the cash flows at the IRR and accept if NPV is positive.arrow_forward
- You are considering the following projects but have limited funds to invest and can't take them all. Using the profitability index, rank the projects in the order in which you would accept them. That is, rank them from best to worst. Project Initial Investment NPVarrow_forwardWhich of the following statements is CORRECT? a. The NPV profile graph for a normal project will generally have a positive (upward) slope as the life of the project increases. b. An NPV profile graph shows how a project's payback varies as the cost of capital changes. O c. An NPV profile graph is designed to give decision makers an idea about how a project's contribution to the firm's value varies with the cost of capital. d. An NPV profile graph is designed to give decision makers an idea about how a project's risk varies with its life. e. We cannot draw a project's NPV profile unless we know the appropriate WACC for use in evaluating the project's NPV.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
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