Chapter 04 Questions and Problems

Chapter 04 Questions and Problems - ENTREPRENEURIAL FINANCE...

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E NTREPRENEURIAL F INANCE : Strategy Valuation and Deal Structure Chapter 4. New Venture Strategy and Real Options Questions and Problems 1. Which of the following decisions are “strategic?” Explain your reasoning. a. An owner of a nursery decides to buy an option on a parcel of land that is contiguous to his nursery b. The nursery owner exercises the option and buys the land c. The nursery owner decides to carry palm trees d. The nursery owner expands his staff by 10 employees e. The nursery owner builds a greenhouse on the plot of land he purchased 2. From the perspective of the entrepreneur explain, in general terms: a. The strategic considerations that would tend to favor small-scale entry over large scale entry; b. The strategic considerations that would tend to favor rapid growth; c. The strategic considerations that would tend to favor vertical integration into manufacturing as well as distribution; d. The strategic considerations that would tend to favor outside equity financing instead of debt. In each case, be sure to focus on the value of the entrepreneur’s interest in the venture rather than the entire venture, taking into consideration the interdependencies among product-market, organizational, and financial strategic choices. Try to support your reasoning with some specific examples. 3. Draw a payoff diagram similar to Figure 4.2a for a one-month call option on Google with an exercise price of $520. What is the value of the option if Google’s share price is $547 on the day the option expires? What is the profit if the option premium is $9.50? 4. What happens to the value of a call option (increase or decrease) for each of the following? Explain why. a. An increase in the exercise price b. An increase in the value of the underlying asset c. An Increase in the time to expiration d. An increase in the volatility of the underlying asset 5. Draw a payoff diagram similar to Figure 4.2b for a three-month put option on Starbucks with an exercise price of $20. What is the value of the option if Starbuck’s share price is $22 on the day the option expires? What about if the share price is $16.50. What is the profit if the option premium is $1.50?
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6. What happens to the value of a put option (increase or decrease) for each of the following? Explain why. a. An increase in the exercise price b. An increase in the value of the underlying asset c. An Increase in the time to expiration d. An increase in the volatility of the underlying asset 7. What is an abandonment option? In what ways might an entrepreneur benefit by agreeing to give an outside investor the option to abandon a venture? 8.
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Chapter 04 Questions and Problems - ENTREPRENEURIAL FINANCE...

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