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Explain the following term related to “Options”; - What are some applications of Options on corporate decisions such as capital budgeting?

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter13: Capital Budgeting: Estimating Cash Flows And Analyzing Risk

Section: Chapter Questions

Problem 10Q: Distinguish among beta (or market) risk, within-firm (or corporate) risk, and stand-alone risk for a...

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Concept explainers

Production Budget

A budget can be defined as a financial plan designed by an undertaking for a definite period in the future that can contribute towards enhancing the financial success of the business undertaking. It is used to estimate the revenue and expenses. The budget generally takes into account both current and future income and expenses.

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Explain the following term related to “Options”;
- What are some applications of Options on corporate decisions such as capital budgeting?

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Explain in detail why corporations engage in capital budgeting, present the pros and cons of the various methods and point out the selection criteria.
Capital budgeting can be affected by factors such as exchange rate risk, political risk, transfer pricing, and strategic risk. Select a mid- or large-sized business organization and explain how each of these factors can affect its capital budgeting. Which factor poses the greatest threat to your selected organization and why? What measures can stakeholders take to reduce adverse impacts of these factors?
In what respect is preferred stock similar to bonds, and in what respect is it similar to common stock? How is a project classification scheme used In the capital budgeting process? Explain.
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Discuss the process of delta hedging an option. Explain why financial institutions perform d hedging, the problems involved and the risks.
Which of the following questions should be considered when developing a corporation’s financial plan? I. How much net working capital will be needed? II. Will additional fixed assets be required? III. Will dividends be paid to shareholders? IV. How much new debt must be obtained?
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Discuss what level of management would be involved in making capital investment decisions?
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Please fill out the table attached and give your opinion on which alternative is preferable (The company’s management wants to finance the expansion in a way that will serve the best interests of present stockholders).