Brealey. Myers. Allen Chapter 22 Test

# Brealey. Myers. Allen Chapter 22 Test - Chapter 22 Real...

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Brealey/Myers/Allen, Principles of Corporate Finance, 8/e 1 Chapter 22 Real Options Multiple Choice Questions 1. The following are the main types of real options: (I) The option to expand if the immediate investment project succeeds (II) The option to wait (and learn) before investing (III) The option to shrink or abandon a project (IV) The option to vary the mix of output or the firm's production methods A) I only B) I and II only C) I,II, and III only D) I, II, III, and IV only Answer: D Type: Easy Page: 597 2. The opportunity to invest in a project can be thought of as a three-year real option, which is worth \$500 million with an exercise price of \$800 million. Calculate the value of the option given that, N(d 1 ) =0. 3 and N(d 2 )=0.15. Assume that the interest is 6% per year. A) \$150 million B) \$49.25 million C) Zero D) None of the above. Answer: B Type: Medium Page: 599 Response: C=500(0.3) - (0.15)(800) /(1.06^3) = 49. 25 3. The opportunity to invest in a project can be thought of as a two year option or an asset which is worth \$400 million (PV of the cash flows from the project) with an exercise price of \$600 million (investment needed). Calculate the value of the option given that N(d 1 ) =0.6 and N(d 2 )=0.4 and interest rate is 6%. A) \$26.4 million B) Zero C) \$200 million. D) None of the above. Answer: A Type: Medium Page: 599 Response: C=400(0.6) - (0.4)(600)/ (1.06^2) = 26.4 4. The DCF approach must be: A) Augmented by added analysis if there are no imbedded options. B) Augmented by added analysis if a decision has significant imbedded options. C) Jettisoned if there are any embedded options. D) Computed carefully to identify the options. Answer: B Type: Medium Page: 599

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Test Bank, Chapter 22 2
Brealey/Myers/Allen, Principles of Corporate Finance, 8/e 3 5. The following are examples of expansion options: (I) A mining company may acquire rights to an ore body that is not worth developing today but could be profitable if product prices increase (II) A film producing company acquiring the rights to a novel to produce a film based on the novel in the future (III) A real estate developer may acquire a parcel of land that could be turned into a shopping mall (IV) A pharmaceutical company may acquire a patent to market a new drug A) I only B) I and II only C) I, II, and III only D) I, II, III, and IV Answer: D Type: Easy Page: 601 6. The opportunity to defer investing to a later date may have value because: (I) The cost of capital may increase in the near future. (II) Uncertainty may be increased in the future. (III) Investment costs fluctuate over time. (IV) Market conditions may change and increase the NPV of the project. A)

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## This note was uploaded on 04/18/2010 for the course FINANCE 936116531 taught by Professor Wuyiling during the Spring '10 term at Nashville State Community College.

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Brealey. Myers. Allen Chapter 22 Test - Chapter 22 Real...

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