Corporate Finance
12th Edition
ISBN: 9781259918940
Author: Ross, Stephen A.
Publisher: Mcgraw-hill Education,
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Textbook Question
Chapter 7, Problem 7CQ
Real Options The Mango Republic has just liberalized its markets and is now permitting foreign investors. Tesla Manufacturing has analyzed starting a project in the country and has determined that the project has a negative
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A manufacturing company plans to expand their production and logistics facility into one of the countries listed in the following table. The cost of building such facilities in each country differ based on the state of its economic and political climate.
What is the best decision alternative using MINIMAX REGRET decision criterion?
What is the best decision alternative using criterion of realism at alpha = 0.8?
Consider the following statement about real options:
The value of a real option is found by taking the difference between the expected NPV of a project with the option and the expected NPV of the project without the option.
True or False: The preceding statement is correct.
False
True
Which type of real option allows a firm to shut down a project if its cash flows are lower than expected?
Investment timing option
Flexibility option
Abandonment option
Growth option
King Snowplows began operations in New York City two years ago. As an independent contractor, the company does the majority of its business working for the city. The company also had offers from surrounding cities in New Jersey and Long Island, but these offers would have required the company to invest in additional snowplows—which have high up-front costs. King Snowplows decided to purchase only the snowplows necessary to handle its contract with New York…
Option pricing methodology is often used in complex real project valuations which allow for business investment opportunities throughout the life-time of the project. Using a simple net present value (NPV) analysis for these projects may lead an incorrect valuation because NPV does not account for flexibility of investment options.
Here is a specific example inspired by the article Sick and Gamba (2010). Suppose you are a consultant hired by a local government. The government needs to raise some cash now and hired you to determine the proper value of a three-year development concession for a specific gold-mine which has 1 million ounces of gold reserves. It is known from past practices that the gold can all be immediately produced in the year when the investment is made for a combined capital and operating cost of $290 million (this amount does not change within the three years). It is costly to store gold and it needs to be sold immediately after it is produced. Abstract from any…
Chapter 7 Solutions
Corporate Finance
Ch. 7 - Forecasting Risk What is forecasting risk? In...Ch. 7 - Sensitivity Analysis and Scenario Analysis What is...Ch. 7 - Prob. 3CQCh. 7 - Break-Even Point As a shareholder of a firm that...Ch. 7 - Prob. 5CQCh. 7 - Real Options Why does traditional NPV analysis...Ch. 7 - Real Options The Mango Republic has just...Ch. 7 - Prob. 8CQCh. 7 - Prob. 9CQCh. 7 - Project Analysis You are discussing a project...
Ch. 7 - Sensitivity Analysis and Break-Even Point We are...Ch. 7 - Prob. 2QAPCh. 7 - Prob. 3QAPCh. 7 - Prob. 4QAPCh. 7 - Prob. 5QAPCh. 7 - Prob. 6QAPCh. 7 - Prob. 7QAPCh. 7 - Prob. 8QAPCh. 7 - Prob. 9QAPCh. 7 - Prob. 10QAPCh. 7 - Prob. 11QAPCh. 7 - Prob. 12QAPCh. 7 - Prob. 13QAPCh. 7 - Prob. 14QAPCh. 7 - Prob. 15QAPCh. 7 - Prob. 16QAPCh. 7 - Prob. 17QAPCh. 7 - Prob. 18QAPCh. 7 - Prob. 19QAPCh. 7 - Prob. 20QAPCh. 7 - Prob. 21QAPCh. 7 - Prob. 22QAPCh. 7 - Prob. 23QAPCh. 7 - Prob. 24QAPCh. 7 - Prob. 25QAPCh. 7 - Prob. 26QAPCh. 7 - Prob. 28QAPCh. 7 - Prob. 29QAPCh. 7 - Prob. 30QAP
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- Internationalization theory suggests that Select one: a. FDI is more likely to take place when the costs of negotiating, monitoring, and enforcing a contract with a second firm is higher. Ob. FDI is more likely to occur when prices are high, competition is intense and lower trade barriers as well as exchange rates are strong. O c. FDI occurs in developing countries only in order to boost their economies and improve the country position. d. None of the options are applicable. Next pagearrow_forwardSuppose that California Co., a U.S.-based MNC that invests in projects all over the world, is analyzing potential projects in various countries in an attempt to pursue diversification. The following graph, which measures risk along the horizontal axis and expected returns along the vertical axis, depicts a point for each potential project in a different country. The blue curve represents the frontier of efficient project portfolios. Use the graph to answer the question that follows. EXPECTED RETURN Frontier of Efficient Project Portfolios True E In comparison to project F, project B has False RISK A expected returns and has ? True or False: A more aggressive firm would prefer a portfolio comprised mostly of projects similar to project E. risk.arrow_forwardPlease don't use Ai solutionarrow_forward
- An e-commerce company based in the United Kingdom is planning to launch a new market in Australia and is concerned about potential volatility in the Australian dollar. Which hedging strategy(s) would be suitable to manage the currency risk in this scenario? Choose all that apply. Purchasing a call option on the Australian dollar Selling Australian dollars forward against the British pound Purchasing a put option on the Australian dollararrow_forwardPlease correct answer and don't use hand ratingarrow_forwardA US manufacturing firm that produces cars in Mexico to sell in the US and the Eurozone would like to reduce the effect of currency fluctuations on its profits. Describe in words the hedging strategy that the company should take. Remember that a possible answer is that the company should not be hedging at all.arrow_forward
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