Consider the Following Situation in Which the Market's Expected Return $\quad$

question 15

Multiple Choice

Consider the following situation in which the market's expected return to investment in vacant land is 15% per annum:
$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ HBU:
$\begin{array}{lcc} & \text { Today } & \text { Next Yr. } \\ & \text { known) } & \text { expected) } \\\text { Value of Completed Built Property }& \$ 500 & \$ 540 \\ \text { Constr \& Dvlpt Cost exclu land) } & \$ 400 & \$ 420 \\ \text { NPV immediate construction) }& \$ 100 & \$ 120\end{array}$



-In the above situation, which of the following is not true:

• A) The land is today worth at least $104.
• B) The optimal strategy is to hold the land undeveloped for now.
• C) The HBU next year is likely to be a slightly larger or more upscale building than the current HBU today.
• D) The source of the option premium is uncertainty or volatility regarding future values.

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