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# fm13 25 - ch 13 mini case for calculations σ 2 = 4.7...

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Mini Case: 13 - 25 Therefore, V = \$56.06(0.4568) - \$75e -(0.06)(3) (0.3142) = \$5.92. Total Value = NPV Of Project 1 + Value Of Growth Option =-\$0.39 + \$5.92 = \$5.5 million j. What happens to the value of the growth option if the variance of the project’s return is 14.2 percent? What if it is 50 percent? How might this explain the high valuations of many dot.com companies? Answer: If risk, defined by σ 2 , goes up, then value of growth option goes up (see the file
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Unformatted text preview: ch 13 mini case.xls for calculations): σ 2 = 4.7%, option value = \$5.92 σ 2 = 14.2%, option value = \$12.10 σ 2 = 50%, option value = \$24.09 If the future profitability of dot.com companies is very volatile (i.e., there is the potential for very high profits), then a company with a real option on those profits might have a very high value for its growth option....
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