Principles of Corporate Finance
13th Edition
ISBN: 9781260465099
Author: BREALEY, Richard
Publisher: MCGRAW-HILL HIGHER EDUCATION
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Textbook Question
Chapter 22, Problem 3PS
Real options True or false?
- a. Real-options analysis sometimes tells firms to make negative-
NPV investments to secure future growth opportunities. - b. Using the Black–Scholes formula to value options to invest is dangerous when the underlying investment project would generate significant immediate cash flows.
- c. Binomial trees can be used to evaluate options to acquire or abandon an asset. It’s OK to use risk-neutral probabilities in the trees even when the asset beta is 1.0 or higher.
- d. It’s OK to use the Black–Scholes formula or binomial trees to value real options, even though the options are not traded.
- e. A real-options valuation will sometimes reveal that it’s better to invest in a series of smaller plants rather than a single large plant.
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Beta and CAPM
Is it possible that a risky asset could have a beta of zero? Explain. Based on the CAPM, what is the expected return on such an asset? Is it possible that a risky asset could have a negative beta? What does the CAPM predict about the expected return on such an asset? Can you give an explanation for your answer?
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Chapter 22 Solutions
Principles 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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