a)
To discuss: Meaning of real option, managerial option, strategic option and embedded option.
a)
Explanation of Solution
Real options exist when managers may control the size of cash flows of a project by various actions during the lifespan of the project. These are called real options because, as opposed to financial assets, these deal with real. These are also referred to as managerial options because these offer managers the opportunity to respond to changing market conditions.
These are sometimes referred to as strategic options as they often tackle strategic concerns. At last, they are also called as embedded options as they are also as a part of another project.
b)
To discuss: Investment timing option, abandonment option, growth option and flexibility option.
b)
Explanation of Solution
Investment timing strategies offer companies the option of continuing a project instead of immediately implementing it. This waiting option allows a company to reduce market uncertainty before deciding to implement the project.
Capacity options allow a business to respond to changing market conditions and improve the capacity of its output. That involves the prospect of contracting or increasing production. Growth options allow a company to grow if demand on the market is higher than expected.
This includes the opportunity to expand into various geographic markets and introduce additional or second-generation products. It also includes the option to abandon a project if there is too much deteriorate in market conditions.
c)
To discuss: Decision tree.
c)
Explanation of Solution
Decision trees are a method of analysis of scenarios where different actions are taken in different scenarios.
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Chapter 14 Solutions
Mindtapv2.0 Finance, 1 Term (6 Months) Printed Access Card For Brigham/daves' Intermediate Financial Management (mindtap Course List)
- Define each of the following terms: h. Real options; managerial options; strategic options; embedded optionsarrow_forwardDescribe the general approach we use toaccount for performance-based options and options with market-related conditions.arrow_forwardCritically discuss three factors that determine the value of a call option and a put option.arrow_forward
- In a qualitative analysis, what factors affect the value of a real option?arrow_forwardDescribe about the Option-pricing models?arrow_forwardDescribe the five variables (Assets price, Strick price or Exercise Price, Risk- Free- Rate, Time to Expiration, Volatility) that Black-Scholes-Merton Formula uses to calculate the price of call and put options. Explain how the change in these variables (Assets price, Strick price or Exercise Price, Risk- Free- Rate, Time to Expiration, Volatility) affects the price of the option.arrow_forward
- Distinguish between beta (i.e., market) risk, within-firm (i.e., corporate) risk, and stand-alone risk for a potential project. Of the three measures, which is theoretically the most relevant, and why?arrow_forwardIf a set of investment alternatives contains all possible choices that can be made, then the set is said to be which of the following? a. Coherent b. Collectively exhaustive c. Independent d. Mutually exclusive.arrow_forwardList and describe four different types of real options that are associated with investment projects.arrow_forward
- Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning