PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Chapter 22, Problem 6PS
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.
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Compute the value of a real option using the following information:
PV(project cash flows) = 51.6, NPV(project cash flows) = 1.6,
Project upfront cost = 50, Risk-free rate = 4%, NPV volatility = 45.9%, Years to expiration = 1,
d1 = 0.0674, d2 = -0.3795, N(d1) = 0.5269, N(d2) = 0.3522, el-04"1) – 0.960789
Round your answer to two decimal places, e.g. 92.993 --> 92.99, 92.987 --> 92.99
3
9. The historical returns for two investments-A and B-are summarized in the following table for the period 2016 to 2020,
Use the data to answer the questions that follow.
a. On the basis of a review of the return data, which investment appears to be more risky? Why?
b. Calculate the standard deviation for each investment's returns.
c. On the basis of your calculations in part b, which investment is more risky? Compare this conclusion to your observation
in part a.
Review Only
Click the icon to see the Worked Solution.
a. On the basis of a review of the return data, which investment appears to be more risky? Why? (Choose the best answer
below.)
O A. The riskier investment appears to be investment B, with returns that vary widely from the
average relative to investment A, whose returns show less deviation from the average.
O B. Investment A and investment B have equal risk because the average returns are the same.
O C. The riskier investment appears to be investment A, with returns…
When specifying the minimum attractive rate of return (MARR): a. Use the value 10%, as it is an easy multiple to work with b. Exercise caution in calculating it, as once it is defined, you can use it indefinitely for all future investments c. Ensure that it reflects the opportunity cost associated with investing in the candidate alternative as opposed to investing in other available alternatives d. Calculate the weighted average cost of capital(WACC) to establish the upper bound on the MARR.
Chapter 22 Solutions
PRIN.OF CORPORATE FINANCE
Ch. 22 - Real options Respond to the following comments. a....Ch. 22 - Prob. 2PSCh. 22 - Real options True or false? a. Real-options...Ch. 22 - Prob. 4PSCh. 22 - Real options Describe each of the following...Ch. 22 - Expansion options Look again at the valuation in...Ch. 22 - Expansion options Look again at Table 22.2. How...Ch. 22 - Prob. 8PSCh. 22 - Timing options Look back at the Malted Herring...Ch. 22 - Prob. 10PS
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