It Is Possible Conceptually to Distinguish Two Underlying Sources of Option-Based

question 18

Multiple Choice

It is possible conceptually to distinguish two underlying sources of option-based land value over and above the current difference between the value of the best building that could currently be built on the site and the construction cost exclusive of land) of that building, the underlying reasons why it makes sense to wait before immediately commencing a positive-NPV construction:

• A) Systematic risk, and idiosyncratic risk.
• B) Competing demand for the site, and competing supply of other similar sites.
• C) Growth expectations of the value of the evolving highest and best use HBU) for the site, and irreversibility of construction once it is begun building today is mutually exclusive with building tomorrow on the same site.
• D) The time value of money, and the risk premium necessary to compensate investors for land value risk.

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Definitions:

Sales Commission

A payment made to a salesperson or broker for facilitating a sale, typically calculated as a percentage of the sale price.

Load Fund

A mutual fund that charges a fee (load) for buying or selling shares, in addition to the management fees.

Managed Investment Company

A company that pools funds from investors to collectively invest in securities.

Hedge Funds

Investment funds that employ various strategies to earn returns for their investors, often involving higher risk.