chapter brealey, myers, and allen principles of corporate finance 11th edition real options 22...
TRANSCRIPT
Chapter
Brealey, Myers, and Allen
Principles of Corporate Finance
11th Edition
REAL OPTIONS
22
Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin
22-2
22-1 VALUE OF FOLLOW-ON INVESTMENT OPPORTUNITIES
• Four Types of Real Opinions • Opportunity to expand, make follow-up investments
• Opportunity to wait, invest later
• Opportunity to shrink or abandon project
• Opportunity to vary firm’s output or production methods
• Value of real option = NPV with option
− NPV without option
22-3
TABLE 22.1 CASH FLOW AND FINANCIAL ANALYSIS OF MARK I MICROCOMPUTER
• Mark I Microcomputer in Millions
22-7
FIGURE 22.1 POSSIBLE PRESENT VALUES FOR MARK II IN 1985
• Distribution shows range of possible present values for Mark II project 1985
• Expected value roughly $800 million (less than required investment of $900 million)
• Option to invest pays off in shaded area above $900 million
22-10
22-2 TIMING OPTION
• Intrinsic value plus time premium equals option value
• Time premium equals value of being able to wait
Opt
ion
pric
e
Stock price
22-12
FIGURE 22.2 TIMING OPTION EXAMPLE
• Possible cash flow and end-of-period values for malted herring project shown in black
• Project costs $180 million
• Red figures in parentheses show payoffs from option to wait and invest later in project, now positive-NPV at year 1
• Waiting means loss of first year cash flow; figuring out current value of option is difficult
22-14
22-2 TIMING OPTION
• High demand generates $25 million, $250 million value at end of year
• Low demand generates $16 million with no value
High Demand Low Demand
375.
1200
)25025(return Total
12.
1200
)16016(return Total
Risk neutral return
22-15
22-2 TIMING OPTION
• Calculate probability of high demand for malted herring project
• Option value
343. demandhigh of Prob
05.return Expected
(-.12)demand)high of prob1(375.demand)high of prob(return Expected
22-17
22-3 ABANDONMENT OPTION
• Example • Mrs. Mulla gives nonretractable offer to buy company for $150 million at anytime within next year
• Given possible outcomes
• What is value of offer?
• What is most Mrs. Mulla could charge for that option?
• Use discount rate of 10%
22-18
22-3 ABANDONMENT OPTION
Year 0 Year 1 Year 2
120 (.6)
100 (.6)
90 (.4)
NPV = 145
70 (.6)
50 (.4)
40 (.4)
•Example
22-19
22-3 ABANDONMENT OPTION
Year 0 Year 1 Year 2
120 (.6)
100 (.6)
90 (.4)
NPV = 162
150 (.4)
Option value =
162 − 145 =
$17 Million
22-23
FIGURE 22.6 AIRCRAFT PURCHASE OPTION
• If implemented at year 3, option guarantees fixed price and delivery at year 4
• Without option, plane can still be ordered at year 3 but with uncertain price and delivery
22-26
22-6 CONCEPTUAL PROBLEM
• Real options are not always feasible to use• Options can be complex; it is sometimes impossible to arrive at “perfect” answer
• No clear structure to path and cash flows
• Competitors have real options, which alter option values by altering underlying assumptions and environment that serves as basis of valuation