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fm13 13 - to the paper is to use a question-and-answer...

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Mini Case: 13 - 13 MINI CASE Assume that you have just been hired as a financial analyst by Tropical Sweets Inc., a mid- sized California company that specializes in creating exotic candies from tropical fruits such as mangoes, papayas, and dates. The firm's CEO, George Yamaguchi, recently returned from an industry corporate executive conference in San Francisco, and one of the sessions he attended was on real options. Since no one at Tropical Sweets is familiar with the basics of real options, Yamaguchi has asked you to prepare a brief report that the firm's executives could use to gain at least a cursory understanding of the topics. To begin, you gathered some outside materials the subject and used these materials to draft a list of pertinent questions that need to be answered. In fact, one possible approach
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Unformatted text preview: to the paper is to use a question-and-answer format. Now that the questions have been drafted, you have to develop the answers. a. What are some types of real options? Answer: 1. Investment timing options 2. Growth options a. Expansion of existing product line b. New products c. New geographic markets 3. Abandonment options a. Contraction b. Temporary suspension c. Complete abandonment 4. Flexibility options. b. What are five possible procedures for analyzing a real option? Answer: 1. DCF analysis of expected cash flows, ignoring option. 2. Qualitatively assess the value of the real option. 3. Decision tree analysis. 4. Use a model for a corresponding financial option, if possible. 5. Use financial engineering techniques if a corresponding financial option is not available....
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