PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Chapter 22, Problem 9PS
Timing options Look back at the Malted Herring option in Section 22-2. How did the company’s analysts estimate the present value of the project? It turns out that they assumed that the probability of low demand was about 45%. They then estimated the expected payoff as (.45 × 176) + (.55 × 275) = 230. Discounting at the company’s 15% cost of capital gave a present value for the project of 230/1.15 = 200.
- a. How would this present value change if the probability of low demand was 55%? How would it change if the project’s cost of capital was higher than the company cost of capital at, say, 20%?
- b. Now estimate how these changes in assumptions would affect the value of the option to delay.
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calculations.)
b. If the discount rate is infinite, what is the NPV? (A negative answer should be
indicated by a minus sign.)
c. At what discount rate is the NPV just equal to zero? (Do not round intermediate
calculations and enter your answer as a percent rounded to 2 decimal places, e.g.,
32.16.)
a. NPV
b. NPV
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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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