CORPORATE FINANCE-ACCESS >CUSTOM<
11th Edition
ISBN: 9781260170016
Author: Ross
Publisher: MCG CUSTOM
expand_more
expand_more
format_list_bulleted
Videos
Textbook Question
Chapter 23, Problem 10QP
Real Options You are in discussions to purchase an option on an office building with a strike price of $63 million. The building is currently valued at S60 million. The option will allow you to purchase the building either six months from today or one year from today. Six months from today, accrued rent payments from the building in the amount of $900,000 will be made to the owners. If you exercise the option in six months, you will receive the accrued rent payment, otherwise, the payment will be made to the current owners. A second accrued rent payment of $900,000 will be paid one year from today with the same payment terms. The standard deviation of the value of the building is 30 percent, and the risk-free rate is a 6 percent annual percentage rate. What is the price of the option today using six-month steps? (Hint: The value of the building in six months will be reduced by the accrued rent payment if you do not exercise the option at that time.)
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
You are in discussions to purchase an option on an office building with a strike price of $92 million. The building is currently valued at $86 million. The option will allow you to purchase the building either six months from today or one year from today. Six months from today, accrued rent payments from the building in the amount of $1,040,000 will be made to the owners. If you exercise the option in six months, you will receive the accrued rent payment; otherwise, the payment will be made to the current owners. A second accrued rent payment of $1,040,000 will be paid one year from today with the same payment terms. The standard deviation of the value of the building is 40 percent and the risk-free rate is an annual percentage rate of 5.4 percent. What is the price of the option today using a two-state model with six-month steps? (Hint: The value of the building in six months will be reduced by the accrued rent payment if you do not exercise the option at that time.) (Do not round…
You are in discussions to purchase an option on an office building with a strike price of $63 million. The building is currently valued at $60 million. The option will allow you to purchase the building either six months from today or one year from today. Six months from today, accrued rent [ayments from the building in the amount of $900,000 will be made to the owners. If you exercise the option in six months, you will receive the accrued rent payment. Otherwise, the payment will be made to the current owners. A second accrued rent payment of $900,000 will be paid one-year from today with the same payment terms. The standard deviation of the value of the building is 30 percent, and the risk-free rate is a 6 percent annual percentage rate. What is the price of the option today using six-month steps? (Hint: The value of the building in six months will be reduced by the accrued rent payment of ou do not exercise the option at the time
As CFO of a small manufacturing firm, you have been asked to determine the best financing for the purchase of a new piece of equipment. The vendor is offering repayment options of $9,000 at the end of each year for five years, or no payment for two years followed by one payment of $41,500. The current market rate of interest is 11%. Calculate present value of both options.
Present Value:
Option 1=_________________
Option 2=_________________
Chapter 23 Solutions
CORPORATE FINANCE-ACCESS >CUSTOM<
Ch. 23 - Employee Stock Options Why do companies issue...Ch. 23 - Real Options What are the two options that many...Ch. 23 - Project Analysis Why does a strict NPV calculation...Ch. 23 - Real Options Utility companies often face a...Ch. 23 - Prob. 5CQCh. 23 - Real Options Star Mining buys a gold mine, but the...Ch. 23 - Real Options You are discussing real options with...Ch. 23 - Real Options and Capital Budgeting Your company...Ch. 23 - Insurance as an Option Insurance, whether...Ch. 23 - Real Options How would the analysis of real...
Ch. 23 - Prob. 1QPCh. 23 - Prob. 2QPCh. 23 - Binomial Model Gasworks, Inc., has been approached...Ch. 23 - Real Options The Webber Company is an...Ch. 23 - Real Options Jet Black is an international...Ch. 23 - Real Options Sardano and Sons is a large, publicly...Ch. 23 - Real Options Wet for the Summer, Inc.,...Ch. 23 - Prob. 8QPCh. 23 - Binomial Model In the previous problem, assume...Ch. 23 - Real Options You are in discussions to purchase an...Ch. 23 - Prob. 1MCCh. 23 - Prob. 2MCCh. 23 - Your options, like most employee stock options,...Ch. 23 - Why do you suppose employee stock options usually...Ch. 23 - Prob. 5MCCh. 23 - Prob. 6MC
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- Jullo Company is considering the purchase of a new bubble packaging machine. If the machine will provide $20,000 annual savings for 10 years and can be sold for $50,000 at the end of the period, what is the present value of the machine investment at a 9% interest rate with savings realized at year end?arrow_forwardAs CFO of a small manufacturing firm, you have been asked to determine the best financing for the purchase of a new piece of equipment. The vendor is offering repayment options of $9,000 at the end of each year for five years, or no payment for two years followed by one payment of $41,500. The current market rate of interest is 11%. Calculate present value of both options. Pv option 1= option 2=arrow_forwardA Services company is projecting that demand for its services will rise considerably the next three years. They can lease additional equipment for $1,600 at the beginning of every quarter for three years. Alternatively, they can purchase the equipment for $22,995 at 8% compounded quarterly. The salvage value of the equipment after three years is expected to be $4,000. 1. What is the present value of each offer? A. Lease: B. Purchase: 2. Which option would you recommend and how much better is that option in today's dollars?arrow_forward
- You arc considering a luxury apartment building project that requires an investment of $12,500,000. The building has 50 units. You expect that the maintenance cost for the apartment building will be $250,000 in the first year, and to rise to $300,000 in the second year, and to continue to increase by $50,000 in subsequent years. The cost to hire a manager for the building is estimated to be $80,000 per year. After five years of operation, the apartment building can be sold for $14,000,000. What annual rent per apartment unit will provide a return on investment of 15%? Assume that the building will remain fully occupied during the five years.arrow_forwardA case study analysis of leasing business equipment compared to purchasing the same equipment.How do you determine whether you should lease or buy a piece of equipment for your business? Let's assume you're faced with the following lease-or-buy decision:You can purchase a $50,000 piece of equipment by putting 25 percent down and paying off the balance at 10 percent interest with four annual installments of $11,830. The equipment will be used in your business for eight years, after which it can be sold for scrap for $2,500.The alternative is that you can lease the same equipment for eight years at an annual rent of $8,500, the first payment of which is due on delivery. You'll be responsible for the equipment's maintenance costs during the lease.You expect that your combined federal and state income tax rate will be 40 percent for the entire period at issue. You further assume that your cost of capital is 6 percent (the 10 percent financing rate adjusted by your tax rate).Question:Using…arrow_forwardA certain piece of equipment has a list price of $120,000. The manufacturer offers two options for paying for the equipment. Option A: An initial down payment of $20,000 plus additional payments of $20,000 per year at the end of each of the next six years.Option B: A single payment of $108,000 at the time of purchase (i.e., a 10% discount for paying in cash).(a) What annual interest rate would you be paying if you selected Option A? (b) What is the implicit annual interest rate associated with the financing offered in Option A when compared against the discount offered in Option B?arrow_forward
- You are considering purchasing an investment contract that will eventually pay you $4,000 per year at the end of each year for seven years. The appropriate interest rate for the risks involved is 6.4% The first payment begins in 6 years. What price should you pay today to purchase this contract (rounded to nearest dollar) ? (Do not round interim calculations)arrow_forward3) You are purchasing a car and have the option to pay $25,000 in cash (upfront) OR assume a lease with end of the month payments of $399 for five years. By purchasing, you will receive an estimated residual value (or scrap value) by selling the car for $2,500 at the end of the 5 years. If interest is 2.7% compounded annually, which financing option would you prefer? (16.1 DCF)arrow_forward13. You can purchase a 10,000 square foot office building for $1,900,000. You can finance your purchase with an 80% loan at 4.675% interest, requiring monthly payments over 25 years. Rents are $24.00 per square foot and expenses are $10.00 per square foot. You project vacancy to be 12% in years 1 and year 2, 8% in year 3 then 6% thereafter. You expect that rents will increase by 6% per year for years 2 and 3, then increase by 4% thereafter. You believe that expenses willincrease at a fixed rate of 5% per year. You expect to sell the building on a 7 cap, based on the following year’s income. For a holding period of 8 years. What is the (BEFORE TAX): Before Tax IRR on Equity ? Before Tax NPV @ 12% ?arrow_forward
- An investor is considering the purchase of a rental house for $120,000. The house generates monthly rent of $1.150 per month with no expected vacancy, and annual operating expenses are expected to be $4,800. The investor expects to hold the property for five years and then hopes to sell for $150,000.Based on these assumptions, what is the expected overall eturn on this investment? (a) 9.27 (b)10.22% (c)10.69% (d)11.48% (e) 12.40%arrow_forwardAn investor is considering the purchase of a rental house for $120,000. The house generates monthly rent of $1.150 per month with no expected vacancy, and annual operating expenses are expected to be $4,800. The investor expects to hold the property for five years and then hopes to sell for $150,000.Based on these assumptions, what is the expected overall eturn on this investment? 9.12% 10.22% 10.69% 11.48% 12.40%arrow_forwardConsider a firm with a contract to sell an asset for $151,000 four years from now. The asset costs $96,000 to produce today. a. Given a relevant discount rate on this asset of 13 percent per year, calculate the profit (or loss) the firm will make on this asset. b. At what rate does the firm just break even? a.arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Managerial AccountingAccountingISBN:9781337912020Author:Carl Warren, Ph.d. Cma William B. TaylerPublisher:South-Western College Pub
Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning
Principles of Accounting Volume 2AccountingISBN:9781947172609Author:OpenStaxPublisher:OpenStax College
Managerial Accounting
Accounting
ISBN:9781337912020
Author:Carl Warren, Ph.d. Cma William B. Tayler
Publisher:South-Western College Pub
Intermediate Financial Management (MindTap Course...
Finance
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Cengage Learning
Principles of Accounting Volume 2
Accounting
ISBN:9781947172609
Author:OpenStax
Publisher:OpenStax College
Accounting for Derivatives Comprehensive Guide; Author: WallStreetMojo;https://www.youtube.com/watch?v=9D-0LoM4dy4;License: Standard YouTube License, CC-BY
Option Trading Basics-Simplest Explanation; Author: Sky View Trading;https://www.youtube.com/watch?v=joJ8mbwuYW8;License: Standard YouTube License, CC-BY