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Real Options Assignment

In: Business and Management

Submitted By jiahanzheng
Words 2337
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FIN 855 – FINANCIAL MANAGEMENT, SPRING 2014

Real Options Assignment

Multiple Choice Questions (3 points each)
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

2. The opportunity to invest in a project can be thought of as a three-year real option on an asset which is worth $500 million (PV of the cash flows from the project) with an exercise price of $800 million (investment needed). Calculate the value of the option given that, N(d1) = 0.3 and N(d2) = 0.15. Assume that the interest rate is 6% per year.
A) $150 million
B) $49 million
C) $30 million
D) None of the above.

3. The DCF approach must be:
A) Augmented by added analysis if there are no embedded options.
B) Augmented by added analysis if a decision has significant embedded options.
C) Jettisoned if there are any embedded options.
D) Computed carefully to identify the options.

4. 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

5. The opportunity to defer investing to a later date may have value because:
(I) The cost of capital may increase in the near...

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