UPENN: LOOSE LEAF CORP.FIN W/CONNECT
17th Edition
ISBN: 9781260361278
Author: Ross
Publisher: McGraw-Hill Publishing Co.
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Textbook Question
Chapter 23, Problem 4QP
Real Options The Webber Company is an international conglomerate with a real estate division that owns the right to erect an office building on a parcel of land in downtown Sacramento over the next year. This building would cost $55 million to construct. Due to low demand for office space in the downtown area, such a building is worth approximately $53.2 million today. If demand increases, the building would be worth $57.9 million a year from today. If demand decreases, the same office building would be worth only $49.8 million in a year. The company can borrow and lend at the risk-free annual effective rate of 4.8 percent. A local competitor in the real estate business has recently offered $1.8 million for the right to build an office building on the land. Should the company accept this offer? Use a two-state model to value the real option.
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J&R Construction Company is an international conglomerate with a real estate division
that owns the right to erect an office building on a parcel of land in downtown
Sacramento over the next year. This building would cost $61 million to construct. Due to
low demand for office space in the downtown area, such a building is worth
approximately $59 million today. If demand increases, the building would be worth $63.4
million a year from today. If demand decreases, the same office building would be worth
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offered $760,000 for the right to build an office building on the land. What is the value of
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round intermediate calculations and enter your answer in dollars, not millions of
dollars, rounded to 2 decimal places, e.g., 1,234,567.89.)…
J&R Construction Company is an international conglomerate with a real estate division that owns the right to erect an office building on a parcel of land in down- town Sacramento over the next year. This building would cost $65 million to construct. Due to low demand for office space in the downtown area, such a building is worth approximately $58.7 million today. If demand increases, the building would be worth $70.4 million a year from today. If demand decreases, the same office building would be worth only $55.2 million in a year. The company can borrow and lend at the risk-free annual effective rate of 4.8 percent. A local competitor in the real estate business has recently offered $1.8 million for the right to build an office building on the land. Should the company accept this offer? Use a two-state model to value the real option.
CASE STUDY
Giangelo Corporation would like to venture in manufacturing a specialized tool that is required
by a semi-conductor company. In order to accomplish this, it is considering two options that
both require raising large amount of funds. First option (Project X) is the construction of a
factory building and acquisition of machineries for an estimated cost of P30 million. The other
alternative (Project Y) is the acquisition of an existing company that manufactures the same
tool at a price of P50 million.
In order to fund the project, the Company will have to apply for a loan from a bank and issue
shares of stocks. The management contemplated a more leveraged approach by availing the
70% of the financial requirements through loan borrowing and the rest from the issuance of
shares. The interest on bank loan is at 11% per annum while the issuance of shares will require
return to stockholders at 8% per annum. The applicable income tax rate is 25%.
Both of the projects will have…
Chapter 23 Solutions
UPENN: LOOSE LEAF CORP.FIN W/CONNECT
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
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