Assignment 4

Assignment 4 - no cash payment right now What is the value...

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FINA 537 Equity Valuation Professor Laura Xiaolei Liu CITIC Tower II Due Friday December 11 before class (e-copy and hard copy) Assume you worked in the property development team of CPL at the end of June 2000, you need to evaluate the offer given by the seller and give your recommendation to Mr. Larry Yung. After several days of hard work, your team reached an agreement that you should focus on capital value (price) indices in your analysis and ignore the rental indices. You also agreed that the information in Exhibit 1 is redundant and you can ignore it in your analyses. Exhibit 2 and 3 show some post-mid- 2000 information. You are not allowed to use these numbers as they are not known in June 2000. Answer the following questions: 1. As the price of the option, the sellers requested an equity stake of 5% in the completed project. (For example, if in the end the CITIC Tower II has 100 floors, the sellers can get 5 floors. There will be
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Unformatted text preview: no cash payment right now.) What is the value of this 5% in the completed project for seller? (Use any approach you prefer.) 2. What’s the value of this “option to delay” (net of cost) for CPL? Use two approaches: Black-Scholes Model and binomial tree method assuming one quarter as a step. 3. Should you suggest Mr. Yung to accept the offer from the seller? 4. Will your above answers change if seller asks for 18% of the stake instead of 5%? 5. One of your team members suggests that CPL bargain hard with the seller for a better option that is not only exercisable at the end of one year, but also exercisable at the end of each quarter in the one year period. What’s the value of this new option (assume the seller asks for 5% of the stake)? Should CPL bargain hard to get this new option instead of the proposed one?...
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