PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Question
Chapter 22, Problem 8PS
a.
Summary Introduction
To discuss: The advantage of waiting.
b.
Summary Introduction
To discuss: The reasons on developing the property immediately.
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Students have asked these similar questions
When considering the time value of money in making an investment decision, an investor would purchase a property when:
I. Present Value < purchase price
II. IRR (Internal Rate of Return) < discount rate (investor’s required return)
A: I only
B: II only
C: both I and II
D: neither I nor II
What are the advantages/disadvantages of real estate as alternative investments?
A commercial real estate company has an option to develop a parcel of land. Assuming the
dynamics of land value, L, are described by geometric Brownian motion with drift a and
volatility o, and that the cost of developing the land is I, answer the following questions.
Assume the economy is risk-neutral and the instantaneous risk-free rate of interest is r.
a. Compute the value of the development option, F(L), and the optimal exercise policy, L,
assuming the firm can exercise the option at any time.
b. In a more realistic setting, the company may face competition that damages the value of its
growth options. For simplicity, assume that the arrival of competition can be described as
a Poisson process with intensity parameter 2; and that conditional on the arrival of
competition, the development option becomes worthless (i.e., drops in value to zero).
Compute the value of the option, F(L), and the optimal exercise policy, L, under this
competition scenario.
c. Compare the optimal exercise…
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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- You are considering investing in real estate—both for the short-term cash flows and the potential long-term capital gains—and are evaluating both a commercial lease property (such as a strip shopping center or an office building) and a residential rental property (such as several rental houses or a small apartment complex). It is likely that you will invest in only one of these properties at this time. The general data regarding these investments is as follows: propertytype price mortage rental income (per year) depreciationexpense (per year) Estimatedresalevalue small office $800,000 $448,000 $136,016 $7,692 $912,000 rental homes $650,000 $292,500 $91,281 $8,273 $685,100 The first potential investment consists of an office building with ten offices, which has a current market price of $800,000. Of this amount, $200,000 represents the cost of the land, and the balance, $600,000, is attributable to buildings on the property. The second possible investment, which…arrow_forwardWhich best defines Market Value? Group of answer choices: Whatever the market will bear. Most probable selling price, assuming “normal” sale conditions What an investor is willing to pay for a property. The appraised value.arrow_forwardWhen measuring the investment performance of something as broadly defined as real estate, What one must keep many things in mind?arrow_forward
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