CHAPTER_22 - 1 ) × P] – [N(d 2 ) × PV(EX)] = [0.4002 ×...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
1 CHAPTER 22 Real Options Answers to Problem Sets 2. The company can buy furniture and resell (abandon) if the start-up fails, but the abandonment value of used furniture is not great. It’s often better to retain flexibility by renting. 4. a. You learn more about land prices and best use of the land. b. By developing immediately, you capture rents immediately. 7. a. True b. True c. True d. True e. True—the series of smaller plants generates real options, but the large plant may nevertheless be more efficient. 11. P = 1.7 EX = 2 σ = 0.15 t = 1.0 r f = 0.12 0.4029 ) 1.0 (0.15 0.2529 t σ d d 0.2529 /2 ) 1.0 (0.15 ) 1.0 )]/(0.15 /1.12 log[1.7/(2 /2 t σ t X)]/ σ log[P/PV(E d 1 2 1 1 = × = = = × + × = + = N(d 1 ) = N(-0.2529) = 0.4002 N(d 2 ) = N(-0.4029) = 0.3435 Call value = [N(d
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Background image of page 2
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: 1 ) × P] – [N(d 2 ) × PV(EX)] = [0.4002 × 1.7] – [0.3435 × (2/1.12 1 )] = $0.0669 million or $66,900 2 12. The asset value from Practice Question 11 is now reduced by the present value of the rents: PV(rents) = 0.15/1.12 = 0.134 Therefore, the asset value is now (1.7 – 0.134) = 1.566 P = 1.566 EX = 2 σ = 0.15 t = 1.0 r f = 0.12 0.9503 ) 1.0 (0.15 0.8003 t σ d d 0.8003 /2 ) 1.0 (0.15 ) 1.0 )]/(0.15 (2/1.12 log[1.566/ /2 t σ t X)]/ σ log[P/PV(E d 1 2 1 1 − = × − − = − = − = × + × = + = N(d 1 ) = N(-0.8003) = 0.2118 N(d 2 ) = N(-0.9503) = 0.1710 Call value = [N(d 1 ) × P] – [N(d 2 ) × PV(EX)] = [0.2118 × 1.566] – [0.1710 × (2/1.12 1 )] = $0.0263 million or $26,300...
View Full Document

This note was uploaded on 05/09/2011 for the course FNAN 522 taught by Professor Wilson during the Spring '11 term at University of Louisiana at Lafayette.

Page1 / 2

CHAPTER_22 - 1 ) × P] – [N(d 2 ) × PV(EX)] = [0.4002 ×...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online